Reading IRS Proposed Regulations on Employer-Provided Commuting in the Era of Pandemic and Civil Unrest
Today, a guest post from my partner Ruth Wimer. Last week, the IRS issued extensive proposed regulations addressing Qualified Transportation Fringes (QTF), as revised by the 2017 TCJA, which generally include the $270 per month exclusion for parking, transit passes and commuter highway vehicles. The proposed regulations also include limited guidance with respect to “commuting” from an employee’s residence to the employee’s place of employment. With respect to the proposed regulations on commuting, executives, companies and executive compensation, professionals should be aware of the following six points:
First, the disallowance for commuting expenses such as a car service or travel on the corporate jet is separate and distinct from the QTF disallowance for parking (and other QTF benefits). The proposed regulations treat the two disallowances very differently in nearly all respects.
Second, the fact that the TCJA disallows the deduction to the employer does not increase the income inclusion to the executive. For example, if the deduction disallowance for commuting is $100,000, and the executive’s income inclusion is only $20,000 due to the use of the favorable IRS income inclusion rules for fringe benefits, the executive still has only $20,000 of reported compensation income.
Third, the commuting disallowance applies to commuting from the “hub” in the city in which the employee has a residence, to the “hub” in the city of the employee’s place of employment. We had hoped that only local commuting would be covered, based on the literal language of the statute, which referred to commuting as from the residence to place of employment.
Fourth, and unfortunately, the employer’s deduction is disallowed with respect to “all costs” related to the commute, and is not reduced for the amount included in the executive’s taxable income. For example, if the cost of commuting from the executive’s city of residence to the city of his or her employment, is $100,000, and the income inclusion to the executive is $20,000, the employer deduction disallowance is still the full $100,000, and the executive still pays tax on $20,000. Consequently, employer-provided commuting (e.g., on the company jet) can have a double negative tax effect, because both the employer and employee suffer a tax detriment.
Fifth, the definition of “residence” is based on all facts and circumstances, and can include boats, co-ops and a variety of abodes. Notably, “residence” is not limited to a single primary residence. Thus, it is possible that an executive with residences in multiple cities could be deemed to be commuting from any of those cities to any other city where there is a place of employment, increasing the possible deduction disallowance to the employer.
Sixth, and by way of good news, the proposed regulation makes clear that if there is a bona fide security concern as described in Section 1.132-5(m) of the regulations, the deduction disallowance does not apply. This was not exactly generous of the IRS because the commuting disallowance statutory language, Section 274(l), provides an exemption from the deduction disallowance for expenses necessary to “ensure the safety of the employee.” Existing regulations provide that “a bona fide business-oriented security concern exists only if the facts and circumstances establish a specific basis for concern regarding the safety of the employee.” (See, Independent Security Studies Provide Tax Benefits and Protect Valued Executives.) In this age of coronavirus exposure, disgruntled employee threats and general public unrest, it may be reasonable in many instances to base a full deduction for commuting expenses on the exception related to concerns for the executive’s safety.
-Mike Melbinger, CompensationStandards.com July 1, 2020
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