Vernoia, Enterline + Brewer, CPA LLC

Tax benefits of van pooling

In a recently-released information letter to a taxpayer, the IRS outlined the rules for excluding the costs of van pooling, which is one type of qualified transportation fringe benefit. Code Sec. 132(a)(5) allows an employee to exclude from his or her income a specified amount of costs spent on qualified transportation fringe benefits such as parking, transit passes, bicycle commuting, and van pooling. Under current law for 2014, the maximum monthly fringe benefits exclusion for transit benefits, including van pools, is $130, down from $245 for 2013.

Background

A commuter highway vehicle (a van pool) may constitute a qualified transportation fringe if the vehicle:

  • has a seating capacity of at least six adults (not including the driver);
  • can reasonably be expected to be for transporting employees between their residences and their place of employment for at least 80 percent of its mileage; and
  • is used on trips during which the number of employees transported for such purposes is at least 50 percent of the adult seating capacity (not including the driver).

These requirements put together are known as the “80/50” rule.

Types of van pools

The IRS explained that the application of the 80/50 rule depends on whether the van pool is an employer-operated van pool, an employee-operated van pool, or a private or public transit-operated van pool:

Blue minibus on highwayEmployer-operated van pool. In an employer-operated van pool, the employer either purchases or leases vans to enable employees to commute together to the employer’s place of business or the employer contracts with and pays a third party to provide the vans and pays some or all of the costs of operating the vans. If an employer-operated van meets the definition of a commuter highway vehicle, then the value (up to the statutory monthly limit) of an employer-operated van pool used by an employee is a nontaxable qualified transportation fringe. If a van pool is employer-operated, the van must comply with the 80/50 rule for the value of the benefit, or the employer’s reimbursements of the employee’s costs, to qualify as transportation fringes and be excluded from income and employment taxes, the IRS explained.

Employee-operated van pool. In an employee-operated van pool, the employees, independent of their employer, operate a van to commute to their places of employment. If the van meets the definition of a commuter highway vehicle, then the employer’s cash reimbursement to employees for expenses incurred in connection with an employee-operated van pool (up to the statutory monthly limit) is a nontaxable qualified transportation fringe. If a van pool is employee-operated, the van must comply with the 80/50 rule for the value of the benefit, or the employer’s reimbursements of the employee’s costs, to qualify as transportation fringes and be excluded from income and employment taxes, the IRS explained.

Private or public transit-operated van pool. In a private or public transit-operated van pool, public transit authorities or a person in the business of transporting persons for compensation or hire owns or operates the van pool. The van must seat at least six adults (not including the driver). The 80/50 rule does not apply to private or public transit-operated van pools, the IRS explained.

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