TRAVEL, BENEFITS

Qualified Transportation Plans and Public Transportation

Many entrepreneurs and their employees use public transportation to get from point a to point b. If you or your employees travel for business related purposes using public transportation the cost of your trips may be fully deductible. Additionally, business owners can deduct certain tax exempt public transportation benefits provided to employees for travel to and from work that would ordinarily not be deductible. Regardless of the type of travel (business or commuting), if you meet IRS requirements the cost of public transportation can be included on your Schedule C and potentially generate additional payroll tax savings for you and your employees.

AUTHOR / SPEAKER

Tanya is a freelance writer with one employee. Tanya rents a small office in WeWork, which is a 45 minutes away from her employee's home. Despite there being a formal mass transit plan available in her city, Tanya provides her employee with a pre-tax $200 reimbursement each paycheck to cover commuting costs. While Tanya has every right to reimburse her employee for commuting costs, providing $200 per month of tax-free reimbursements exceeds the IRS limit of $130 per month. Additionally, since Tanya does not pay directly for transportation costs despite having the option to, she is not in compliance with IRS rules. For her commuting benefits to be deductible, Tanya would need to either withhold tax on the $200 and pay it as part of wages or limit her reimbursement to $130 tax free dollars paid directly to her employee's mass transit account.

TASKER

Sam is a tasker who specializes in house cleaning. He does not have a permanent office since the nature of his job requires him to travel to peoples homes to work (temporary job site). Last year Sam spent $550 on bus fare going between his home and temporary work sites located within his city. Unfortunately, since Sam does not have a principal place of business, he would not be able to deduct these transportation costs. Note however that if Sam had an office / principal place of business or traveled outside his city for work his transportation costs to temporary work sites would be fully deductible on his Schedule C.

DESIGNER

Sasha owns her own fashion design firm in Los Angeles, California. She has one employee who commutes via bus every day from his home Century City to the office in Venice. Each month, Sasha loads $130 tax free dollars onto her employee's metro pass. Since this meets the IRS requirements of a qualified transportation plan, Sasha would save approximately $213 over the course of a year on employer taxes and be able to deduct $1,560 ($130 x 12 months) on line 24a of her Schedule C. Additionally, her employee would save approximately $650 on income and payroll taxes (may vary based on individual state and federal income tax rates).

PROFESSIONAL SERVICES

Wendy is a sole proprietor architect who hired an intern to help her out over the summer. Over the ten weeks the intern was employed, there was one night her intern worked until 2am in order to meet project deadlines. Wendy paid a $12 cab fare so her intern could get home safely. Ordinarily, trips between home and the office would not be deductible, however, since this trip served a business purpose, was infrequent and low value it could be considered deductible and exempt from payroll taxes.

MORE ON DEDUCTING PUBLIC TRANSPORTATION COSTS

If you use public transportation to travel for business it doesn't matter if you take a taxi, uber, bus, subway, ferry, train, etc., all of these costs can be 100% deductible if your trip qualifies as allowable business travel (see diagram).
Deductible qualifying transportation plans can include tax exempt compensation of up to $130 per month for transit pass or commuter highway vehicle reimbursement, $250 for parking reimbursement, or $20 per month for bicycle commuting reimbursement. Note however that you cannot take all three benefit types at the same time, you must choose one. In addition to qualifying transportation plans, you can deduct de minimis (in frequent and low value) transportation benefits provided to employees (i.e. occasional taxi fare home if they work late).
If you provide your employees with a qualified transportation fringe benefit you will save on your employer payroll taxes, including 6.2% on social security tax, 1.45% on medicare tax and up to 6% on state and federal unemployment taxes. Further, your employees will save on their portion of social security and medicare taxes, not to mention be exempt from income tax withholding on qualifying transportation benefits (within IRS limits).
If you reimburse your employees for qualified transportation plans in excess of limits defined by the IRS, additional amounts will not be eligible for favorable tax treatment and should be paid as normal wages. Additionally, qualifying transportation plans should be paid by you directly to the transportation vendor (i.e. you load money directly on to your employee's transportation pass) -- Paying your employees before-tax reimbursements for qualifying transportation is not recommended, since conceivably there is nothing preventing them from spending the tax free dollars on something else (it is only allowed if your employees cannot exchange a voucher or similar item for a transit pass).
Remember that unless you are deducting a qualified transportation plan fringe benefit, you cannot deduct transportation costs for travel between your home and your office, your home and a second job, or your home and a temporary work location if you don't have a regular office. Refer to our diagram above.

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Travel & Car Expenses

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