Are local transportation costs deductible?
It is increasingly common for employers to offer transportation or travel benefits to employees, but this raises a question: are they deductible for the employer? Are they taxable for employees? The most important feature of local transportation rules is that transportation costs are not deductible. But let’s review in detail what are the exceptions to the rule.
Transportation costs are usually not deductible.
The fare you pay, or the miles an employee drives to and from work, are categorized as personal and non-business.
An exception applies for travel to a temporary workplace outside the metropolitan area where you usually live and work. “Temporary,” for this purpose, means a place where your work is expected to last (and indeed lasts) no more than a year.
The purpose is twofold:
To allow companies to deduct the cost of reimbursing employees for these costs as a benefit to employees.
Allow employers not to include these refunds as taxable income for employees. This is usually an exclusion from income tax withholding and FICA taxes, but it also affects the employer’s unemployment tax liability.
Costs of traveling from the workplace to other sites
However, once you arrive at the workplace, the cost of any local travel you take for business purposes is a deductible business expense. So, for example, the cost of traveling from your office to visit a client or pick up supplies is deductible. Similarly, if you have two business locations, traveling between them is deductible.
No deductions for employer transportation expenses
The Tax Cuts and Jobs Act of 2017 eliminated business tax deductions for employers who provide employees public transportation and parking benefits, starting in 2018 and onwards. This means you cannot deduct any travel expenses, described as payment or reimbursement for travel between your employee’s home and your workplace unless these payments are “necessary to ensure the safety of your employee.”
There is one exception: bicycle travel expenses. Until 2025, you can deduct qualified bike ride reimbursements as a business expense, but the total refund amount is subject to.
Taxable Transportation Benefits for Employees
This section discusses travel benefits for employees and whether they are taxable for the employee. There are two types of benefits: de minimis (small amounts) and qualified.
De minimis transport benefits
De minimis benefits are small amounts infrequently awarded, for which accounting would be unreasonable or impractical. For example, if you give an employee a taxi fare once to get home because he missed the last bus while working late at your request, that’s de minimis.
Note: To be considered de minimis, the payment must be infrequent and for a small amount. A benefit cannot be de minimis if it is based on hours worked. Those payments are wages and fall into minimum wage and overtime issues. If the payment or reimbursement is de minimis, you do not have to include it in the employee’s taxable wages.
You don’t have to include de minimis benefits for transit passes, tokens, or travel cards for public transit systems, up to $21 per month, in an employee’s salary. You can also give employees a voucher or reimburse them up to the same $21 per month. If you reimburse employees, you should have a way to verify that they are using public transportation to get to work.
Qualified Transportation Benefits
You can provide certain qualified transportation benefits to employees without including them in the employee’s taxable wages or salaries, up to specific limits. These transports are included:
Riding in a commuter road vehicle between the employee’s home and work
A commuter road vehicle accommodates at least six adults (not counting the driver). At least 80% of the mileage must be for the transportation of employees between home and work, and at least half of the seats (not counting the driver) must be for employees.
A transit pass is a pass, token, fare card, coupon, or something similar that entitles someone to travel for free, at a reduced rate on public transportation, or in a rental vehicle with seating for six adults (not counting the driver).
Qualified parking consists of parking your business reserves for employees near your office or near public transportation, commuter road vehicles, or carpools. Does not include parking in or near an employee’s home.
Refund verification is required.
What makes these benefits “qualified,” i.e., non-taxable for employees, is a refund agreement. You must have a specific reimbursement plan to exclude these benefits from employee wages. The plan must require employees to verify expenses before reimbursing them. You can also give vouchers to employees if they follow detailed protocols to verify how the voucher was used.