As many employers recognize, under Internal Revenue Code § 132 and regulations, an employer may provide certain transportation benefits to employees on a tax-free basis, if the transportation expenses are incurred via qualifying commuter highway vehicles, vanpools, transit passes, parking, and bicycles. As ride-sharing services, such as Uber and Lyft, become more and more popular, the issue arises as to whether an Uber or Lyft commute can be provided on the same tax-free basis. As is the case with many legal questions, the answer depends upon the specific circumstances.
Do “Vanpool” Rules Apply to Uber and Lyft?
Of the several qualifying tax-free commuter expenses, only the “vanpool” exemption would appear to apply to Uber and Lyft. Generally speaking, up to $255 per month (for 2016) in vanpool expenses may be excluded from the employee’s income. Somewhat different rules apply, however, depending upon whether the van pool is:
“Private or public transit operated”
Employer-Operated or Employee-Operated Vanpools
When it comes to either employer-operated or employee-operated vanpools, the vehicle must seat at least six adults (not counting the driver) and at least 80 percent of the vehicle’s mileage must reasonably be expected to be (1) used to transport employees between their residences and their jobs and (2) used on trips during which the number of employees transported for commuting is at least 50 percent of the vehicle’s adult seating capacity (again, not counting the driver). Neither the employer-operated nor the employee-operated vanpools would appear to work in an Uber/Lyft scenario.
Private or Public Transit Operated Vanpool
Private or public transit operated vanpool vehicles must seat at least six adults (not counting the driver), but it need not meet the “80/50 rule” mentioned above. IRS regulations also require the vanpool to be owned and operated either by public transit authorities or by any person in the business of transporting persons for compensation or hire.
UberPool Service and LyftLine Appear to Qualify, at Least Under Some Circumstances
Uber’s “UberPool” service and Lyft’s “LyftLine” would appear to qualify as private transit operated vanpools, provided that the vehicle had the appropriate number of seats. For example, in some cities, such as Boston, UberPool serves a maximum of four riders. Under that arrangement, it would not appear to qualify for tax-free treatment. In other cities, however, UberPool and Lyft offer six-passenger vehicles. Under that situation, the ride sharing could qualify.
Generally, the IRS requires an employer to provide vouchers, or the functional equivalent, to the employee who then uses the voucher to pay for the ride service. It remains to be seen whether that arrangement can be set up under Uber or Lyft. Employers must also determine the fair reasonable value of each commuter’s ride. Here, some tax experts say the IRS regulations haven’t quite caught up to the ride-sharing model.
Employee Benefit Policies Are Part of an Overall HR System
When considering tax-free commuter plans and any other form of employee benefit, careful attention needs to be given to a host of important details. Failure to follow the Internal Revenue Code and/or the applicable regulations can have tax consequences for both the employer and the employee. Is it time that your business reviewed its employee benefit policies and procedures? CKB VIENNA provides employment/labor counseling and litigation services to nearly every type of business, from Fortune 500 corporations to startups and nonprofits. Our attorneys provide specialized legal/business consulting services and offer guidance designed to avoid the consequence and cost of litigation, including compliance with laws in the areas of hiring, promotion, discipline, termination, compensation, harassment, substance abuse, wage and hour, affirmative action, and independent contractor arrangements. CKB VENNA has a long history of representing clients in all types of business issues. We have offices in Rancho Cucamonga, San Bernardino, and Los Angeles. Contact us by telephone at 909.980.1040 or complete our online form.