The 2017 Tax Cuts and Jobs Act changed the tax code. In exchange for lowering rates, though, the law also removed some tax breaks.
Several tax benefits for commuter expenses were removed — especially for employees who bike to work.
However, biking to work is still a good choice for many employees. It’s better for the environment than some other options and provides an opportunity for healthy exercise.
Here’s how tax changes will impact your and your cyclist employees’ commuter benefits and taxes.
Spoiler: The financial impact may be far less than you or your employees think.
Past Commuter Tax Benefits
Before the recent tax changes, your employees were able to pay for certain commuting expenses using pretax dollars — money on which they owed no taxes. You could set up your payroll so that these costs came out of your employees’ paychecks before they received the rest of their money.
In 2017, employees were allowed to exclude up to $255 per month for other commuting expenses like parking passes, metro tickets and bus fares, according to the Society for Human Resource Management. They were also able to exclude up to $20 per month from taxes for bike-related expenses, for example buying a bike, a helmet or a lock or paying for maintenance.
And as an employer, if you paid for employee commuting expenses as a fringe benefit, you were able to deduct this cost as a business expense.
Changes Under The New Law
The new tax law removes the benefit for bicycle commuting expenses. If an employee is paying these expenses out of their paycheck, in other words, that payment will now be taxed as income in 2018. The tax bill also removed the employer deduction for covering employee commuting expenses.
The good news is that employees can still pay for other commuting expenses out of their paycheck using pretax money, since the tax bill did not remove these commuter benefits.
Planning Bike Benefits
While it will be disappointing to some that the tax break will not be available going forward, in reality it was a relatively tiny benefit to begin with. If an employee claimed the full $240 a year and was in a 25 percent tax bracket, their actual tax savings would be $60. Chances are that employees who bike to work will not stop because of this change.
Employers should continue promoting this healthy habit because biking to work is a terrific way to stay in shape. In lieu of the tax break, consider offering an extra bonus payment to bicyclists. You could also join a bike share program to make it easier for employees to bicycle to work. These are inexpensive ways to offer another wellness program that can lower your health care costs.
Other Commuting Expenses
Let employees know that if they’ve been paying for commuting expenses out of pretax payroll, they can continue doing so for 2018. Note that the IRS increased the tax exclusion limit to $260 per month, allowing employees to save a little more this year.
Whether you should continue covering commuting expenses yourself is a tougher decision, since it’s no longer tax-deductible for your business. Take the time to determine whether this benefit is still affordable if it no longer reduces your taxes.
Another option would be to end your reimbursement program and offer employees a pay raise, giving them the option to cover commuting expenses themselves out of pretax payroll. Alternatively, leasing a building that includes ample parking may allow you to deduct the cost while potentially alleviating some of your employees’ commuting woes.
Be sure to consult with your tax advisor and your staff to figure out the best way to continue supporting your employees and minimizing your taxes. While the new tax law might mean adjusting your approach, there will always be a way to accomplish both objectives.