QUESTION: Our company is opening a new facility in a bicycle-friendly location. We would like to encourage our employees at the new location to ride a bike to work, but we’ve heard that bicycle commuter benefits are no longer permitted. Is that true? If we can offer bicycle benefits, what will be the tax consequences?
ANSWER: Employers can still offer bicycle commuting benefits to their employees, but the tax consequences have changed. Prior to 2018, qualified bicycle commuting expense reimbursements could be excluded from employees’ income and could be deducted by the employer. The exclusion applied only to reasonable expenses incurred for the purchase, improvement, repair, or storage of a bicycle regularly used for travel between home and work, and only if the reimbursements were paid during a prescribed time period. It allowed a maximum exclusion of up to $240 per year in qualifying reimbursements from federal income and employment taxes (i.e., income tax withholding, FICA, and FUTA), but the actual exclusion for any particular employee depended on the number of months during the year that were “qualified bicycle commuting months” for the employee. A month was “qualified” only if the employee’s bicycle was used for a substantial portion of the travel between home and work, and the employee did not receive any other qualified transportation fringe benefit during that month.
For taxable years beginning after 2017 and before 2026, Congress suspended the exclusion for qualified bicycle commuting reimbursements by removing them from the Code’s definition of a “qualified transportation fringe” during the suspension period. As a result, if employees receive bicycle benefits prior to 2026, those benefits will need to be treated as taxable compensation unless Congress restores the exclusion.
The tax deduction consequences for an employer providing bicycle benefits are a little more complicated. When it suspended the exclusion for bicycle benefits, Congress also generally amended the Code to eliminate any deduction for “any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee.” During the suspension period, however, the employer deduction is preserved for bicycle benefits that would have been excludable (absent the suspension). As a result, if an employer provides bicycle benefits during the suspension period (prior to 2026), the employer can still take a deduction for its expense up to the amount it pays or incurs to provide qualified bicycle commuting reimbursements. However, any bicycle benefits that do not meet the Code’s definition of a qualified bicycle commuting reimbursement will not be deductible during the suspension. After the suspension ends, all bicycle commuting benefits will lose their deduction.
If your company does not need to maximize its tax deduction, you might consider providing bicycle benefits that are different from or exceed those that would have been excludable. For example, reimbursements for bicycle-sharing program rental fees are not considered qualified bicycle commuting reimbursements and thus are not deductible. If maximizing the company’s deduction is essential, your company might decide to limit benefits to those that would have been excludable before the suspension. After the suspension ends in 2026, no deduction will be available for bicycle commuting benefits (subject to the safety exception), so your company will then have no tax reason to limit bicycle benefits to reimbursements that were excludable prior to 2018.
For more information, see EBIA’s Fringe Benefits manual at Sections XX.G (“Bicycle Commuting Reimbursement”) and XX.T.1 (“Code §274: Employer Deduction Unavailable for 2018 and Later Years”).
Contributing Editors: EBIA Staff.