Energy Act changes to transportation benefits, travel expenses, and backup withholding.

• Author: Hevener, Mary B.
• Position: Comprehensive National Energy Policy Act of 1992

The Comprehensive National Energy Policy Act (Public Law No. 102-486), which was signed by President Bush on October 24, includes among its revenue-raising provisions several changes to the tax treatment of transportation benefits, expenses for extended travel away from home, and the backup withholding rate. All these changes are effective for benefits provided and amounts paid on and after January 1, 1993.

Many of these changes could be described as "tax increases," but President Bush nevertheless signed the legislation, because these revenue-raisers are combined both with certain tax decreases, and with many other non-tax energy provisions supported by the Administration. Also, it can be argued that the tax provisions affecting employer-provided commuting benefits may encourage commuters to take mass transit instead of driving alone in cars, thus promoting energy conservation (which is one of the goals of Public Law No. 102-486).[1](*)

1. Qualified Transportation Benefits

   The several changes in Public Law No. 102-486 affecting the tax treatment of employer-provided mass transit, van pooling, and parking generally will expand, but in some respects will limit, the existing exclusions for these transportation benefits, effective for benefits provided on and after January 1, 1993.[2] The revised exclusions are contained in new section 132(f) of the Internal Revenue Code, and are referred to as "qualified transportation fringes."

   1. Mass Transit Subsidy

      The existing exclusion for employer-provided mass transit benefits will be increased to $60 per month (from $21 per month). This $60 monthly exclusion in 1993 will apply even if the employer pays for the entire cost of an employee's commuting by mass transit. (The $60 limitation will be indexed for inflation after 1993, so that it increases in $5.00 increments.) In contrast to this new exclusion, the current exclusion under Treas. Reg. [section] 1.132-6(d)(1) provides a de minimis exclusion only if the employer's subsidy of an employee's mass transit commuting expenses is strictly limited to $21 per month. Under the more generous new rules, if an employer provides, for example, $65 per month in transit benefits in 1993, the employee will be taxed only on $5 of such monthly benefits. (This excess must be taxed to the employee, because new section 132(f)(7) prevents any "qualified transportation benefits" in excess of the specified dollar limits from qualifying as either a de minimis fringe or a working condition fringe.)

      In one respect, the $60 per month exclusion is more limited than the current $21 per month exclusion, because it prevents cash reimbursements for mass transit passes from qualifying for any exclusion, unless transportation vouchers or similar employer-purchased passes, tokens, or farecards are not "readily available." By contrast, under current law bona fide cash reimbursements for transit expenses qualify for the exclusion.[3] Although an attempt was made during the legislative process to add a reference to "cash reimbursements" in the bill, several transit voucher companies reportedly lobbied to require the use of vouchers whenever possible; this would induce employers to use their administrative services instead of merely reimbursing employees directly in cash for all (or part) of the employees' substantiated public transit expenses. To avoid having to use the services of such voucher companies, many large employers will presumably establish their own voucher programs by negotiating directly with mass transit authorities.

   2. New Subsidy for Van Pools

      This new $60 per month exclusion will also be extended to van pools in certain "commuter highway vehicles" that must seat at least six passengers and that are reasonably expected to be used 80 percent of the time to transport at least three employees at once (plus the driver) between their residences and place of employment. Because under current law most van pool rides by employees other than "control employees" may be valued at $1.50 each way,[4] if an employee commutes round trip between home and work 20 times each month, this expanded statute will exclude the entire value of all 20 commutes starting in 1993. (The 20 round trips would be valued at $60.) More frequent users of the van and "control employees" must be taxed on the value of commutes in excess of $60 per month, if the "$1.50 each way" valuation rule is elected.

      If employees take more than 20 trips per month, or if "control employees" commute, it may still be possible to exclude the value of all these trips, if the employer elects to apply the "shared vehicle use" valuation rules of existing law, which permit the Annual Lease Value or cents-per-mile value of the vehicle to be allocated among all employees, based on all the facts and circumstances.[5] The "control employees" who are not eligible for the special $1.50 each way valuation rule include employees earning over $124,670, officers earning over $62,345, directors, and one-percent owners. The "shared vehicle use" valuation rules may provide values close to $1.50 per trip even for...