Reimbursements for faulty transit cards taxable

Tax Hot Topics newsletterIn a Chief Counsel Advice memorandum (CCA 201949019), the IRS addressed whether employer cash reimbursements to employees for malfunctioning transit passes may be excludible from the employees’ income as qualified transportation fringe benefits.

The value of qualified transportation fringe benefits is generally excludible from employee income provided certain requirements are met. For commuting benefits to qualify as qualified transportation fringes, the employer generally must provide employees with vouchers, transit passes and other similar items in lieu of cash reimbursements, so long as such transit fare items are readily available for distribution to the employees.

The IRS provided that any cash reimbursements for transit pass users with malfunctioning cards are not qualified transportation fringe benefits and are includible in the employees’ income as wages subject to employment tax withholding. It emphasized that when an employer provides a voucher or transit card to its employees, the benefit is considered provided. Malfunctions in the card or the system reading the card do not mean that the transit pass was not readily available for distribution to the employees. The card or transit pass need only entitles the employee to the benefit, and there is no requirement in the Internal Revenue Code or regulations that the employee ultimately avail himself or herself of the transit benefit or that the benefit be available at any time for the employee’s use.
Jeff Martin
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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