Buried in the fine print of the sprawling 2017 federal tax legislation is a policy change that could have a significant impact on transit and auto use. As described in RPA’s April report, New Directions for Commuter Benefits Tax Policy, private businesses can no longer deduct employee transit or parking costs as a business expense, and non-profits need to pay Unrelated Business Income Tax (UBIT) on those costs. While employees still receive the tax savings from programs like TransitChek that allow them to pay transit costs with pre-tax dollars or have fares paid by their employer, employers now have less incentive to provide these benefits. Typically, employers would now pay 21% tax on these benefits. For example, an employer with 10 employees using $100 a month of salary for transit or a parking space with that value, the added tax would be 21% of $12,000, or, $2,520.
In theory, this could have a bigger impact on parking benefits, which are far more common than transit benefits. With 260 million private cars on the road and as many as four parking spaces per car, less employer-provided parking could substantially reduce auto travel and boost transit use. However, it’s far more likely that transit benefits will feel the most impact of the new provisions because parking benefits are easier to hide and difficult to measure while transit costs are easily calculated, and because of the law’s language and IRS guidance issued in 2018. This will reinforce substantial and long-standing incentives for driving, and roll back equity and sustainability gains the transit programs delivered over the past forty years.
Early evidence suggests most employers are not abandoning their transit programs, but employers can be expected to avoid tax on the true cost of parking they provide. For example, the IRS regulations say parking costs remain deductible if over 50% of the parking is for customers, as in shopping centers. But even one transit-using employee would cause added tax. And IRS did not speak to parking included in leases, which is very common. In softer economic times, employers may be more likely to cut their transit programs.
There has been an outcry from religious institutions, hospitals and other non-profits over the need to pay UBIT, and from bike advocates as cycling benefits were removed entirely until 2026. Congress is already considering changes to the law, but getting anything enacted in the polarized political climate will be difficult. More promising is the possibility to change IRS rules, especially to better address parking. Included in the RPA report among other ideas is that IRS could set a default cost for parking benefits (e.g., $100 per month per employee if parking is provided) just as it does for travel expenses or vehicle use. And small employers or charities might be exempted.
But it’s unclear if IRS will re-address this topic any time soon. It is currently seeking input on its 2019-2020 Priority Guidance Plan, to help them decide which areas to address. Transit advocates are submitting comments encouraging that focus on changing the 2018 regulations. Comments are due by June 7. Contact Nat Bottigheimer ([email protected]) for more information.
