Which transportation expenses qualify for pre-tax commuter benefits for employees?
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For 2025, the transportation expenses that qualify for pre-tax commuter benefits for employees are governed by Internal Revenue Code §132(f) and related IRS guidance. These benefits are known as "qualified transportation fringes" and are excludable from an employee's gross income up to certain limits, provided specific requirements are met. Here is a comprehensive explanation of which transportation expenses qualify:
1. Qualified Transportation Fringe Benefits
Under IRC §132(f), the following transportation expenses qualify as pre-tax commuter benefits:
a. Transportation in a Commuter Highway Vehicle
- This refers to transportation provided in a vehicle with a seating capacity of at least six adults (excluding the driver).
- At least 80% of the vehicle’s mileage must be for transporting employees between their residences and place of employment, and on trips where at least half the adult seating capacity (excluding the driver) is filled by employees commuting to work.
- This includes employer-operated vanpools and certain third-party vanpool arrangements.
b. Transit Passes
- A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to transportation (or transportation at a reduced price) on mass transit facilities (public or private), or by any person in the business of transporting persons for compensation or hire in a qualifying commuter highway vehicle.
- This includes bus, rail, subway, and ferry passes.
c. Qualified Parking
- Qualified parking is parking provided to an employee on or near the business premises of the employer, or on or near a location from which the employee commutes to work by mass transit, commuter highway vehicle, or carpool.
- Parking at or near the employee’s residence does not qualify.
2. Exclusion Limits for 2025
For 2025, the monthly exclusion limits are:- $325 per month for the aggregate of commuter highway vehicle transportation and transit passes.- $325 per month for qualified parking.
If the value of the benefit exceeds these limits, the excess must be included in the employee’s taxable wages.
3. Cash Reimbursements
Employers may provide these benefits directly (e.g., by distributing transit passes or paying for parking) or through a bona fide reimbursement arrangement, where employees are reimbursed for actual expenses incurred. For transit passes, cash reimbursement is only allowed if a voucher or similar item is not readily available for direct distribution.
4. Non-Qualifying Expenses
- Qualified Bicycle Commuting Reimbursements: The exclusion for qualified bicycle commuting reimbursements has been permanently repealed and is no longer available as a pre-tax benefit.
- Parking at or near the employee’s residence does not qualify.
- Transportation provided to self-employed individuals, partners, or 2% S corporation shareholders does not qualify under §132(f), but may be excludable under other fringe benefit rules in limited circumstances.
5. De Minimis Transportation Benefits
Occasional local transportation fare (such as taxi fare) provided on an occasional basis due to overtime work may be excludable as a de minimis fringe benefit, but this is separate from the qualified transportation fringe rules and is subject to a much lower monthly limit ($21 per month for transit passes under the de minimis rule).
6. Compensation Reduction Agreements
Employees may elect to have their compensation reduced in exchange for receiving qualified transportation fringe benefits on a pre-tax basis, provided the arrangement does not exceed the monthly exclusion limits.
7. Special Rules
- The value of qualified transportation fringe benefits must be determined on a monthly basis; unused amounts cannot be carried over to subsequent months.
- The benefit must be provided to employees (not independent contractors or partners).
8. Summary Table of Qualifying Pre-Tax Commuter Benefits for 2025
Note: Qualified bicycle commuting reimbursements are not eligible for exclusion as a pre-tax benefit in 2025.
In summary, for 2025, employees may receive pre-tax commuter benefits for transportation in a commuter highway vehicle, transit passes, and qualified parking, subject to the monthly limits described above. Qualified bicycle commuting reimbursements and parking at or near an employee’s residence do not qualify.
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