The Internal Revenue Service has issued guidance on the mass transit tax break that was recently extended by Congress late last month when it passed long-overdue tax extenders legislation, along with a special administrative procedure to help employers cope with the last-minute retroactive extension.

Notice 2015-02 provides guidance with respect to issues related to the retroactive increase in the monthly transit benefit exclusion under Section 132(f)(2)(A) of the Tax Code from $130 per participating employee to $250 per participating employee for the period from Jan. 1, 2014 through Dec. 31, 2014. 

Due to the timing of the statutory change and in order to reduce administrative burden, the IRS is providing a special administrative procedure for employers that treated excess transit benefits as wages and that have not yet filed their fourth-quarter Form 941 for 2014 to make the necessary corrections on their fourth quarter Form 941.

To address employers’ questions regarding the retroactive application of the increased exclusion for 2014 and to reduce filing and reporting burdens, the IRS is clarifying how the increase applies for 2014 and providing a special administrative procedure for employers to use in filing Form 941, Employer’s Quarterly Federal Tax Return, for the fourth quarter of 2014 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2014 and in filing Forms W-2, Wage and Tax Statement.

The Tax Code provides that any fringe benefit that is a qualified transportation fringe is excluded from gross income. The term “qualified transportation fringe” includes (when provided by an employer to an employee): (1) transportation in a commuter highway vehicle between home and work, (2) any transit pass or (3) qualified parking. Cash reimbursements by employers for transit passes constitute a qualified transportation fringe only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.

The amount of fringe benefits provided by an employer to any employee and which may be excluded from gross income can’t exceed $100 per month in the case of the aggregate of transportation in a commuter highway vehicle and any transit pass, or $175 in the case of qualified parking. These amounts are adjusted annually for inflation.

Prior to enactment of the tax extenders in the Tax Increase Prevention Act of 2014, or TIPA, the adjusted maximum monthly excludable amount for 2014 for the aggregate of transportation in a commuter highway vehicle and any transit pass was $130 and the adjusted maximum monthly excludable amount for qualified parking was $250. TIPA amended Section 132(f)(2) to increase the maximum monthly excludable amount 3 for the aggregate of employer-provided commuter highway vehicle transportation and transit pass benefits to an amount equal to the maximum monthly excludable amount for qualified parking. The amendment is effective retroactively beginning on Jan. 1, 2014, and extends through Dec. 31, 2014.

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