The TCJA: Harbinger of Death for Bike-to-Work Tax Deductions
Taxing transportation fringe benefits was one of many changes to the tax code arising from the Tax Cuts and Jobs Act (TCJA). However, most of these benefits are still taxed differently than wages, making the tax code more complicated and favoring some forms of compensation over others. Before the 2017 tax reform law, transportation fringe benefits were generally excluded from worker income for both payroll and income tax purposes and deductible from the employer’s taxable income up to certain amounts.
The main exempted transportation fringe benefits are called Qualified Transportation Fringe benefits (QTF) and include things like commuter highway vehicle rides; transit passes for metro, rail, bus, or ferry; parking in business premises; and biking expenses. The changes made in TCJA’s now require employers to treat only some types of QTFs as deductible, and the rest as nondeductible, meaning employers have to understand precisely what type of QTF they are giving in order to comply with the tax code. Biking, for example, is no longer a deductible QTF.
Making some QTFs nondeductible for businesses also means that the amount employers pay their employees in QTFs, such as commuter vehicle, transit, and parking benefits, would be included in their profits and taxed at the employer’s tax rate: 21 percent for corporations and up to 37 percent for pass-through businesses such as partnerships, LLCs, S corporations, and sole proprietorships which pay taxes through their owners under the individual income tax.
When compared to the 38.5 percent average marginal tax rate on wages, corporations still have an incentive to provide more compensation in the form of nondeductible QTFs compared to wages. However, this is not the case for most pass-through businesses. These entities have almost no tax incentive to provide QTFs because their federal marginal tax rate of up to 37 percent is nearly the same as the average marginal tax rate on wages. As it stands right now, the QTF modifications in the TCJA have essentially removed the incentive for pass-through entities to use many forms of QTF’s, and shareholders of these corporations should factor this in when they are considering how and what QTF’s they decide to issue.