Timing, Cost Thresholds Affect Taxability of Travel Benefits

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By Howard Perlman

Benefits provided to employees for business travel on behalf of their employer or expenses for commuting to and from work sites may be problematic for employers in insufficient communication hampers their ability to properly recognize portions of the benefits that are taxable and portions that are nontaxable, a payroll professional said April 9.

Although accounts payable personnel often are responsible for reimbursing employees for business travel and commuting expenses or sending them advances for these expenses, payroll personnel often are responsible for ensuring that these benefits are properly taxed.

Payroll personnel therefore “need to communicate with accounts payable to find out what the costs being paid on behalf of an employee are so they can be properly taxed,” Linda Dailey, CPP, said at a meeting of the Washington Metropolitan Area Chapter of the American Payroll Association in McLean, Va.

Employees must have a sufficient understanding of the tax implications of business travel and commuting benefits they receive from an employer and the employer's expectations for providing data regarding use of those benefits so that compliance with federal, state and local tax requirements can be achieved, said Dailey, payroll compliance supervisor for Fairfax County, Va.

Business Travel

Employer-provided reimbursements or advances for expenses employees incur for traveling away from home overnight and for not more than one year for the employer's business purposes generally can be nontaxable if the reimbursements or advances are made through an accountable plan, Dailey said.

For an employer's business travel benefits plan to be accountable, reimbursements and advances under the plan must be for work-related expenses that an employee could have deducted on an individual tax return. Additionally, within reasonable periods of time, employees must return to the employer excess amounts not used for their business travel expenses and generally must provide to the employer substantiation of their expenses, including amounts spent, when they were spent and the specific reasons why they were spent.

Business travel expenses generally need to be substantiated to be nontaxable for employees.

There are two methods approved by the IRS for enforcing reasonable periods of time for substantiating business travel expenses and returning excess amounts received but not spent for these expenses, Dailey said.

The fixed-date method requires advances for the expenses to be made no more than 30 days before the related business expenses are incurred, substantiation of the business expenses to be provided by the 60th day after they were incurred and refunds of excess amounts received through an advance or reimbursement to be repaid to the employer by the 120th day after the expenses for which they were provided were incurred.

The periodic-statement method requires an employer to issue to employees at least quarterly statements indicating business travel expenses the employees incurred and for which they have not provided substantiation or refunds of amounts they were provided but did not use to satisfy those expenses, and requires employees to provide substantiation and refunds within 120 days of the date a statement was issued.

Qualified Commuting Benefits

Tax-free benefits can be provided to employees to help them commute to and from work, but these benefits are capped by monthly thresholds of nontaxability, after which reimbursements or advances provided to employees for these commuting expenses are taxable, Dailey said.

For 2015, employees can be granted nontaxable reimbursements or advances of up to $250 a month for parking near or at an employer's work site or near or at a site that the employee parks so that the employee then can use mass transit or a commuter highway vehicle to ride to work.

Employees also can be granted nontaxable reimbursements or advances of up to $130 a month for mass transit passes or costs of using a commuter highway vehicle. A qualified commuter highway vehicle is one that has at least six passenger seats. At least half of the seating must be used by employees commuting to their workplace and at least 80 percent of the mileage of the vehicle must be devoted to transporting commuting employees.

An employee can receive in each month qualified benefits for parking and for mass transit or a commuter highway vehicle, for a maximum monthly nontaxable benefit of $380 for commuting, Dailey said.

Congress has debated over whether the qualified monthly parking benefit should equal the qualified monthly benefit for mass transit or commuter highway vehicles. Although there initially had not been parity between them for 2012 and 2014, Congress in 2013 established parity for 2013 and retroactive parity for 2012 and in 2015 established retroactive parity for 2014 (see PAG Newsletter 1/14/2015 and 1/16/2013).

The monthly benefit thresholds were $240 for 2012, $245 for 2013 and $250 for 2014. Retroactive parity caused some mass transit and commuter highway benefits that had been taxable to become nontaxable, resulting in some employers issuing Forms 941-X and Forms W-2c. There is a possibility that Congress may retroactively enact parity for 2015, benefits experts said.