The IRS has released Revenue Procedure 2020-45, which includes cost-of-living adjustments for employee qualified transportation fringe benefits for the 2021 taxable year, along with annually adjusted numbers for 2021 for a number of other tax provisions.
The combined monthly limit for transportation in a commuter highway vehicle and a transit pass remains unchanged from 2020 at $270. The monthly limit in 2021 for qualified parking is also unchanged from 2020, also at $270.
Internal Revenue Code Section 132(f) allows employers to offer a qualified transportation benefit program to their employees on a tax-free basis. Under this type of program, employees can choose to have money withheld from their taxable compensation to pay or reimburse work-related expenses for qualified parking, transit passes and transportation in certain commuter highway vehicles (e.g., qualifying van pools). Section 132(f) establishes a maximum monthly amount of qualified transportation benefits that employees may exclude from their income, subject to cost-of-living adjustments, which are announced by the IRS before the beginning of each calendar year. Both employee pre-tax salary deferrals and employer-paid benefits, if any, count toward the maximum amount.
Beginning in 2018, the Tax Cuts and Jobs Act of 2017 eliminated the employer tax deduction for qualified transportation benefits. The employer deduction is disallowed regardless of whether the benefits are paid directly by the employer, through a bona fide reimbursement arrangement or through a compensation reduction agreement.
Employers should communicate the monthly limits to their employees to help avoid benefit disputes.
Employees’ tax-free qualified transportation benefit amounts are subject to annual cost-of-living adjustments.
Highlights
- The 2021 monthly limit for transportation in a commuter highway vehicle and transit pass (combined) is $270.
- The 2021 monthly limit for qualified parking is $270.
- Both of these amounts are unchanged from 2020.
This Legal Update is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2020 Zywave, Inc. All rights reserved.