The House of Representatives continues work on a reconciliation bill that would enact significant tax provisions and spending cuts. The various legislative committees have completed work on the areas of the bill within their jurisdiction, including the Ways and Means Committee, which proposed language that would enact $3.8 trillion in tax cuts over the next ten years. Over the weekend, the House Budget Committee consolidated the legislation and the House Bill is now before the Rules Committee, where a managers’ amendment may be considered before it heads to the House floor. This article is one of a series of articles discussing various proposals in the legislation that touch on tax withholding, reporting, and fringe benefits.
Among other changes to the Internal Revenue Code, two of the House Bill’s changes revisit measures included in the 2017 tax reform package (commonly referred to as the “Tax Cuts and Jobs Act”) addressing commuter benefits provided by employers.
The Tax Cuts and Jobs Act eliminated employer deductions for qualified transportation fringes provided under section 132(f). These benefits allow employers to provide transit benefits (such as subway or bus passes), highway van pools, and qualified parking to employees tax-free. Many employers provide this benefit by allowing employees to set aside funds to pay for their commutes or parking with pre-tax dollars. Beginning in 2018, those expenses became non-deductible by the employer.
The Tax Cuts and Jobs Act sought a purported parity between tax-exempt employers and taxable employers with respect to qualified transportation fringes. Because tax-exempt employers would not have been affected by the deduction disallowance, the act instead treated the expenses paid by tax-exempt employers for such benefits as “unrelated business taxable income,” under section 512, thus subjecting them to unrelated business income tax. The provision was met with stiff resistance, and as a result, was repealed retroactively on a bipartisan basis by the Further Consolidated Appropriations Act of 2020. The House Bill would resurrect the Tax Cut and Jobs Act approach by again including the expenses for qualified transportation fringes in unrelated business taxable income.
However, with one exception—bicycle commuting reimbursements of up to $20 a month for expenses such as repair and storage—the employee exclusion was left unaffected for employees of both tax-exempt and taxable employers. With respect to bicycle commuting reimbursements, the law took the opposite approach: suspending the employee exclusion but allowing the employer to deduct the taxable reimbursement provided to the employee (however, section 274(l), also enacted by the same law, may disallow the reimbursements). Unlike the permanent deduction disallowance, the suspension of the exclusion was temporary and is scheduled to sunset at the end of 2025. However, the House Bill would amend section 132(f)(8), which was added in 2017, to permanently eliminate the exclusion.