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Drive tax bargain on transportation costs

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in Small Business Tax

Brighten your employees’ day by giving them a tax break for coming to work.

Strategy: Provide tax-free transportation benefits. If you stick to the monthly limits, the benefits are tax free to your employees and deductible by your business.

The Protecting Americans from Tax Hikes (PATH) Act permanently equalized the monthly-tax-free limits for the three main fringe benefits in this area. The maximum monthly tax-free benefit of $250, which is indexed annually for inflation, is $255 in 2017 (the same as 2016). The three benefits are as follows.

1. Mass transit passes: This includes any pass, token, fare card, voucher or similar item entitling a person to ride free of any additional charge or at a reduced rate on a mass transit system. Such systems can be publicly or privately operated and include transportation by bus, rail or ferry.

2. Commuter highway vehicle expenses: A commuter highway vehicle is any highway vehicle that seats at least six adults (not including the driver). It must be reasonably expected that at least 80% of the vehicle mileage will be for transporting employees between their homes and workplaces with employees occupying at least one-half the vehicle’s seats (not including the driver’s seat).

3. Qualified parking fees: Employers can pay for parking for employees on or near the business premises. This also covers fees for parking on or near the location from which employees commute to work using mass transit, commuter highway vehicles or carpools (e.g., at the park and ride lot for a train station). However, it doesn’t cover parking at or near the employee’s home.

Note that the combined tax-free benefits for mass transit passes and vanpooling can’t exceed the monthly limit. Thus, if your company provides an employee with a total of $455 in mass transit passes and vanpooling benefits a month, he or she is taxed on $2,400 of the benefits ($455 – $255 maximum ? 12 months) in 2017. However, an employer can provide up to $255 a month for mass transit passes or vanpooling and up to another $255 for qualified parking, for a monthly tax-free total of up to $510.  

Tip: Some states also provide tax benefits for commuting expenses.

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