United States     Air and Radiation    EPA 420-S-01-005
      Environmental Protection  Transportation and Air Quality September 2001
      Agency

Commuter Tax
Benefits:
Implementing Commuter
Benefits Under the
Commuter Choice
Leadership Initiative

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COMMUTER CHOICE  LEADERSHIP  INITIATIVE
The National Standard of Excellence for Commuter Benefits
Commuter  Tax  Benefits
Implementing Commuter Benefits under the
Commuter  Choice Leadership Initiative
               The Federal tax code allows tax-free transportation fringe benefits of up to $65 per
               month for transit or vanpool expenses and up to $180 per month for parking. The tax-
               free limit on transit/vanpool benefits will rise to $100 per month for tax year 2002,

               The employer can cover the cost of the tax-free transportation fringe benefit, allow
               employees to reserve income on a pre-tax basis to cover the cost, or share the cost,

               Providing commuter tax benefits to employees can save payroll taxes for employers.
               Because the value of the benefit paid to employees is considered a tax-free transporta-
               tion fringe benefit and not wage or salary compensation, payroll taxes do not apply.
               Giving an employee $65 in transit/vanpool benefits is thus less expensive for an
               employer than raising the employee's salary by $65, Allowing employees to reserve
               income on a pre-tax basis also saves the employer payroll taxes.

               Employees receive more from tax-free transportation fringe benefits than from a compa-
               rable salary increase since they do not pay federal income or payroll taxes on the value
               of the fringe benefit. Employees who reserve income on a pre-tax basis for a qualified
               transportation fringe benefit also save money since they do not pay federal Income or
               payroll taxes on the income reserved.

               Several states provide employers with tax credits for offering commuter benefit programs;

               Providing transit/vanpool benefits is  one of the primary benefits under the Commuter
               Choice Leadership Initiative (CCLI). Employers must offer at least one of three primary
               benefits to their employees in order to participate in the CCLI (the other two are parking
               cash out and telecommuting). Under this option, the employer agrees to provide at least
               $32,50 per month in transit/vanpool benefits for any employee whose actual commuting
               costs are $32.50 or more.

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COMMUTER CHOICE  LEADERSHIP INITIATIVE
The National Standard of Excellence for Commuter Benefits
This document is one in a series of Commuter Choice Leadership Initiative briefing papers designed to help
employers implement commuter benefits.

The U.S. Environmental Protection Agency (EPA) and the U.S. Department of Transportation (DOT) have
established a voluntary National Standard of Excellence for employer-provided commuter benefits.
Commuter benefits help American workers get to and from work in ways that cut air pollution and global
warming pollution, improve public health, increase worker productivity, and reduce expenses and taxes for
employers and employees. Participants in the Commuter Choice Leadership Initiative (CCLI) agree to
meet the National Standard of Excellence, and qualify as Commuter Choice5" Employers. CCLI partici-
pants agree to:

*   Centralize commute options information so that it is easy for employees to access and use;
•   Promote the availability of commuter benefits to employees;
»   Provide access to a guaranteed ride home program;
»   Provide one or more of the following primary commuter benefits:

    /  Vanpool or transit benefits of at least $32.50 per month
    /  Parking cash out of at least $32.50 per month
    /  Telecommuting program that averages six percent of daily work force
    /  Other option proposed by employer and agreed to by EPA
»   Provide three or more of the following additional commuter benefits:
Ridesharing/carpool matching                       .^
Pre-tax transit/vanpool benefits                      /
Shuttles from transit station                        /
Paiking at paik-and-ride lots                        S
Provision of real-time transit information              /
Preferred parking for ridesharers                     S
Reduced parking costs for ridesharers                 •/
Employer-sponsored vanpool or subscription bus        •/
programs                                      /
Employer assisted vanpools                        /
Secured bicycle parking, showers, and iockers
Electric bicycle recharging stations                   ^
                                                       Employee commuting awards programs
                                                       Discounts/coupons for bicycles and walking shoes
                                                       Compressed work schedules
                                                       Telecommuting
                                                       Lunchtime shuttle
                                                       Proximate commute (working closer to home)
                                                       Incentives to encourage employees to five closer to work
                                                       On-site amenities (dry cleaning, etc.)
                                                       Concierge services
                                                       Active membership in a Transportation Management
                                                       Association (TMA) or similar organization
                                                       Other options proposed by employer
    Exceed a minimum benchmark of either 14 percent of employees who do not drive alone to work or an
    average vehicle ridership (the number of vehicles divided by the total number of employees) of 1.12.

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COMMUTER CHOICE LEADERSHIP INITIATIVE
The National Standard of Excellence for Commuter Benefits
                                        Disclaimer

EPA provides this briefing as a service to employers participating in the CCLL Information about private
service providers is intended for informational purposes and does not imply endorsement by EPA or the
federal government.

The information presented here does not constitute official tax guidance or a ruling by the U.S.
Government. Taxpayers are urged to consult with the Internal Revenue Service of the U.S. Department of
Treasury or a tax professional for specific guidance related to the Federal tax law.

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                                  CC11: Commuter Choice Tax Benefits
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COMMUTER TAX BENEFITS;
A SUMMARY		1
  TYPES OF QUALIFIED TRANSPORTATION FRINGE
  BENEFITS.,	1
  THREE WAYS TO PROVIDE TAX-FREE QUALIFIED
  TRANSPORTATION FRINGE BENEFITS	2
                                                    INFORMATION AND CONTACTS.,
                                    	14
TAX SAVINGS FOR EMPLOYERS AND
lLlVl,_rMj \J z iirlL^ .»*.«»«»*-*«*»** *••«**••** ********* *****t***4«****t**«^
 TAX BENEFITS OF EMPLOYER-PAID BENEFITS	A
 TAX BENEFITS OF EMPLOYEE PRE-TAX
 DEDUCTIONS	4
 EMPLOYER/EMPLOYEE COST SHARING	5
APPENDIX A: INTERNAL REVENUE CODE
SECTION 132(F)	15

APPENDIX B: EMPLOYER TAX SAVINGS
WORKSHEET	...17
 OPTION !: TAX-FREE TRANSPORTATION FRINGE
 BENEFIT	17
 OPTION 2; PRE-TAX BENEFIT	17
 OPTION 3: COST SHARING	18

APPENDIX C: BRIEF HISTORY	19
SAMPLE TAX SAVINGS		6
  EXAMPLE I: EMPLOYEE PAYS WITH PRE-TAX
  INCOME	6
  EXAMPLE 2: EMPLOYER. PAYS	7
  EXAMPLE 3: SHARED COSTS	8


STATE TAX CREDITS.....	9
  STATE TAX CREDITS FOR EMPLOYER-PROVIDED
  TRANSIT/VANPOOL BENEFITS	9
  SAMPLE CALCULATION OF TAX SAVINGS WITH
  A STATE TAX CREDIT	10
EMPLOYER QUESTIONS AND ANSWERS—11
 QUESTION: ARE ALL EMPLOYEES ELIGIBLE FOR
 QUALIFIED TRANSPORTATION FRINGE BENEFITS?	11
 QUESTION: 151 IMPLEMENT A TRANSIT/VANPOOL
 BENEFIT PROGRAM, AM I REQUIRED TO OFFER THE
 FULL VALUE OF THE BENEFITS TO MY EMPLOYEE
 
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                                   CCLI: Commuter Choice Tax Benefits
The Federal tax code allows employers to provide
tax-free transit, vanpool, arid parking benefits to
their employees. Called "qualified transportation
fringe" benefits, these commuter benefits can be
deducted from corporate gross income for pur-
poses of taxation when paid for by an employer.
The employer and employee save on taxes since
neither pays federal income or payroll taxes on
these benefits,

The scope of tax-free commuter benefits was
expanded greatly in 1998 with passage of the
Transportation Equity Act for the 21st Century
(TEA-21), This act amended Section I32(f) of
the Internal Revenue  Code as it relates to
employer provided commuter benefits.

Under the revised tax code, qualified transporta-
tion fringe benefits may be offered by employers
in three ways:

•  The employer can cover the foil cost of the
   qualified transportation fringe benefit

•  The employer can allow employees to reserve
   income on a pre-tax basis to cover the costs
   .of.a qualified transportation.fringe benefit;,or.

•  The employer and employee can share the
   costs of the benefit.

For tax year 2001, transit and vanpool expenses
up to $65 per month ($780 per year) and quali-
fied parking expenses up to $180 per month
($2,160 per year) are tax-free. In 2002, the tax-
free limit for transit and vanpool expenses rises to
$100 per month. The monthly tax-free limits are
also indexed to inflation.

These tax-free qualified transportation fringe ben-
efits are often referred to as "Commuter Choice
tax benefit" programs, or simply "commuter benefit"
programs. Through these programs., employers
and employees can receive substantial tax savings
in their payroll and federal income taxes. Also,
some states, including Maryland, Georgia, and
Minnesota, provide state tax credits for employ-
ers that implement commuter benefit programs.

Types of Qualified Transportation Fringe Benefits

According to the Internal Revenue Code Section
132(f)s qualified transportation fringe benefits are
excludable from income for purposes of taxation.

Qualified transportation fringe benefits include:

Transit Passes - Transit passes include any
vouchers, passes, farecards, tokens, or related
items that employees can use to pay for trans-
portation on mass transit facilities or transporta-
tion provided by a person in the business of trans-
porting persons for compensation or hire if such
transportation has a seating capacity of at least
six adults (not including the driver).

Transportation in a Commuter Highway Vehicle -
Better known as a vanpooL, the tax code defines a
"commuter highway vehicle" as a vehicle that has
a seating capacity of at least six adults, not-
including the driver; at least 80 percent of the
vehicle's mileage results from trips between work
and employees'  homes; and during these trips, at
least one half of the vehicle's capacity must be
filled (not including the driver).

Qualified Parking - The term "qualified parking"
is defined as parking near or at the employers'
place of business or parking located near or at a
place where employees commute to work by
mass transit, commuter highway vehicles, or car-
pools (for example, parking at a transit station,
park-and-ride lot, or vanpool staging area).

Qualified transportation fringe benefits include
cash reimbursement by an employer to an

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                                  CCLI:  Commvter Choice Tax Benefits
employee for any of the three benefits described
above. However, cash reimbursement is allowed
for transit/vanpool benefits only in certain cir-
cumstances, when a voucher (or similar item
which may be exchanged only for a transit pass)
is not readily available for distribution (described
further below).

Tax-free Limits and Adjustments

Under current tax law, transit and vanpool
expenses up to $65 per month ($780 per year)
and qualified parking expenses up to $180 per
month ($2,160 per year) are tax-free. In 2002,
according to TEA-21, the monthly limits on tran-
sit and vanpool benefits will increase to $100 and
a determination will be made as to whether the
change in the cost of living necessitates a change
in the monthly limit on qualified parking. For
years after 2002, annual inflation adjustments
will be made on all three benefits,

Three Ways to Provide Tax-Free Qualified
Transportation Fringe Benefits

Qualified transportation fringe benefits may be
offered by employers in three ways:

1)  Company coven full cost of the benefit - Up
   to $65 per month for transit and vanpool
   expenses and $ 180 per month for qualified
   parking expenses is offered tax-free to
   employees and does not incur payroll taxes
   for the  employer or employee.

2)  Company offers a "pre-tax" benefit -
   Employees may have up to $65 per month
   taken out of their current monthly pay towards
   the cost of commuting on transit or in van-
   pools, and up to $180 per month taken out for
   qualified parking expenses, before taxes are
   applied. Employees save federal income and
   payroll taxes. Many employers prefer this
   option because the employee pays the cost,
   and the employer saves money because PICA
   and unemployment taxes do not apply,

3) Employer and employee share costs - Under
   this option,, the employer and  employee each
   pay a share. The employer,, for example, might
   offer $20 per month in transitfranpool bene-
   fits and allow the employee to reserve up to
   $45 per month  as a pre-tax benefit (total tax-
   free benefit maximum remains $65 per
   month). The employer could also offer subsi-
   dized parking, paying $60 per month for a
   $100 space, and allowing the employee to pay
   for the other $40 through a pre-tax salary
   deduction.
      SAVINGS FOR EMPLOYEES '  • -".: '.•
      ......,^j"_^_.w.v ^.^j ,.,,,,, , , • , k , . „„,*  , ,, „,   ' „' , ,,' ,  ,,',,,  ,' ,,"? if
        MPLQYEES  .':... .: '•' :-  ' '"  ." ;;;J;'v:r*'"
By offering tax-free qualified fringe benefits,
both employers and employees can save taxes.
The tax savings depends on the way the benefits
are provided to employees - employer-paid, paid
by employees through a pre-tax salary deduction,
or a combination of both. This section describes
how employers and employees save under each
of these options. Sample calculations of tax sav-
ings  follow in the Sample Tax Savings section.

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                                  CCL1:  Commuter Choice Tax Benefits
Figure 1: Tax Savings for Employers and Employees
  Option
  Employer Tax Benefit
  Employee Tax Benefit
 Employer-Paid: Employers pro-
 vide their employees with up to
 $65/month to commute via transit
 or vanpools (typically in the form
 of passes or vouchers) and/or up
 to $180/month in qualified
 parking.
Compared to providing a salary
increase, the employer saves on
payroll taxes. No payroll taxes
are paid on the value of the
benefit.
Employee receives up to
$65/month tax-free to commute
via transit or vanpools (and/or
$ ISO/month tax-free for qualified
parking). The employee does not
pay any taxes on the value of the
benefit.
 Employee Pre-Tax Deduction:
 Employers allow employees to
 reserve up to $65/month in pre-
 tax income to pay for transit or
 vanpools and/or up to
 $180/month to pay for parking.
Employer saves on payroll taxes
(7.65% savings if the employee's
salary is below the FICA wage
base). No payroll taxes are paid
on the income that is reserved by
the employee.
Employee saves on income tax
and payroll taxes. The amount of
the benefit is no longer treated as
taxable salary.
 Employee, Employer Share
 Costs: Employers pay transit,
 vanpool, or qualified parking
 costs up to a certain limit and the
 employee pays for the remainder
 of the costs through a pre-tax
 deduction. Total employer and
 employee paid costs cannot
 exceed the monthly limits of
 $65/month for transit  and vanpool
 and $180 for qualified parking.
Employer saves on payroll taxes
(7,65% savings if the employee's
salary is below the FICA wage
base) on the portion of the sub-
sidy paid by the employee
through a pre-tax deduction, and
on the value of the benefit provid-
ed to the employee compared to
providing a salary increase.
Employee does not have to pay
any taxes on the portion of the
benefit provided by the employer.
Additionally, the employee saves
on income tax and payroll taxes
by taking a pre-tax deduction to
pay for the remainder of his/her
commuting costs.
1  The employer can also deduct the cost of the benefit as a business expense for purposes of calculating corporate
income taxes, in the same manner that salary payments to employees can be deducted.

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                                   CCLJ: Commuter Choice Tax Benefits
           TAX SAVINGS
This section contains sample calculations for tax savings associated with different types of commuter bene-
fit programs. For all examples, it is assumed that the employee is single with no dependants, pays at a fed-
eral income tax rate of 28 percent, and makes less than the taxable wage base. Corporate income taxes are
assumed to be 34 percent.

Example 1: Employee Pays with Pre-Tax Income*

Craig is an employee at Acme Corporation, making $3,600 per month. Acme Corporation offers its employ-
ees transportation benefits, including allowing employees to pay for transit and vanpool passes using pre-
tax income, up to the monthly limit of $65. Craig elects to do this and uses pre-tax income to purchase his
monthly transit pass, which costs S60 per month.
By electing to use pre-tax income to pay for his transit pass, $60 is taken out of Craig's monthly, pre-tax
income, thereby saving him the FICA and federal income taxes that would normally be applied to that $60
had he purchased his tickets using the money from his paycheck.
Employer (per Employee)

Direct Cost
FICA Cost
Corporate Income Tax
Savings per Month
Savings per Year
Pre-Tax
Income
$0
-
-
$4.59
$55.08
Regular
Salary
$0
$4,59
-


Employee

Direct Cost
FICA Cost
Income Tax
Savings per Month
Savings per Year
Pre-Tax
Income
S60.QO
-
-
$21.39
$256.68
Regular
Salary
$60.00
$4.59
S16.80


Both Craig and Acme pay less in taxes with the pre-tax deduction option. The transit pass costs Craig over
one-third less ($60 minus $21.39, or $38.61) than if he had paid for it through taxable income, with a net
tax savings to the employer.
4 This example was modified from an example given in a publication entitled "Tax Laws and Commute Related
Expenses," which was developed by Charlene Fleming, MPAcc, President, K.E. & Associates, Seattle, Washington, in
November 1999 for King County Metro.

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                                  CCLL Commuter Choice Tax Benefiis
Example 2: Employer Pays

Acme Corporation has decided to provide employees with a tax-free transit/vanpool voucher of up to $65
per month ($780 per year) to help pay commute expenses, Craig elects to accept an employer-paid monthly
transit pass worth $60 per month. Over the course of a year, he will receive $720 worth of transit passes.
For both Craig and Acme Corporation, this arrangement is better than giving him a $720 raise since Craig
actually receives more money and Acme pays less,

If Acme Corporation had raised Craig's annual salary by $720, he would only receive $463.32 in post-tax
income. Because transit benefits are tax-free, he receives the fuil $720 benefit The transit pass is free to
Craig, providing him with a no-cost commute. In total, Craig saves about $256.68 in taxes when his
employer provides him with a tax-free transit benefit rather than the same benefit in salary.
Employer (per Employee)

Direct Cost
PICA Cost
Corporate Income Tax
Net Cost
Savings per Month
Savings per Year
Transit
Benefit
$60.00
-
($20,40)
$39.60
$4.59
$55.08
Salary
Increase
$60.00
$4,59
($20,40)
$44,19


Employee

Direct Cost
PICA Cost
Income Tax
Net Benefit
Savings per Month
Savings per Year
Transit '
Benefit
$60,00
-
-
$60.00
, $21.39
$256.68
Salary
Increase
$60.00
$4.59
$16.80
$38.61


Note: Craig's take home pay through a salary increase would be even lower if he was subject to state and/or
local income taxes, since this calculation does not include state or local income taxes.

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                                   CCLI: Commuter Choice Tax Benefits
Example 3: Shared Costs

Acme Corporation has decided to provide a tax-free fringe benefit of $35 per month. Employees whose
commute expenses exceed this will be allowed to pay the remainder of their expenses using pre-tax income.
For Craig, this means that he will take the $35 tax-free fringe benefit and then use pre-tax income to pay
for the remaining $25 of his transit pass expenses.
Impact on Employer (per Employee) for Employer's
Contributions


Direct Cost
PICA Cost
Corporate Income Tax
Net Cost
Savings per Month
Savings per Year
Transit
Benefit
$35.00
-
(S1L90)
$23.10
$2.68
$32.16
Salary
Increase
$35.00
$2.68
($11.90)
$25.78


Impact on Employee for Employer's
Contributions
•••••••••••••j^^ 	 	

Direct Benefit
PICA Cost
Income Tax
Net Benefit
Savings per Month
Savings per Year
Transit
Benefit
$35.00
-
-
$35.00
$12.48
$149,76
OT**^*,,,,,,,,,,,,,^^
Salary
Increase
$35.00
$2.68
$9.80
$22.52


Impact on Employer (per Employee) for Employee's
Contributions

Direct Cost
PICA Cost Savings
Corporate Income Tax
Savings per Month
Savings per Year
Total Impact
Total Monthly Cost
Total Annual Cost
Transit
Benefit
$0
$1.91
-
$1.91
$22.92

$21.19
$254.28
Impact on Employee for Employee's
Contributions

Direct Benefit
FICA Cost Savings
Income Tax Savings
Savings per Month
Savings per Year
Transit
Benefit
$25.00
$1.91
$7.00
$8.91
$106.92
Total Impact
Monthly Cost Transit Pass
Total Anneal Cost
$16,09
$193.08
Acme's total cost per month for the benefit is $21.19, which consists of $23.10 net cost for the $35 benefit
and $1.91 FICA savings from the employee's pre-tax income. As a. result, the company pays f 254.28 per
year. As shown above, Craig only pays $16.09 per month for the transit benefit with a $60 value.

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                                   CCLI: Commuter Choice Tax Benefits
        ' TAX' Ciiibit.
         .   .'.'.'  ' , • - • , .' •-'. ' '
State Tax Credits far Employer-Provided
Transit/Vanpool Benefits

A number of states have implemented tax incen-
tive programs to encourage employers to provide
transit/vanpool benefits to their employees. These
programs increase the cost savings for businesses:

Maryland - The Maryland Commuter Tax credit
provides a 50 percent tax credit, up to $30 pel-
employee per month, for provision of transit
passes, vanpool benefits, and reimbursement for
caipooling expenses. Employers can elect to
which tax they wish to apply the credit, such as
the state income tax, the financial institution fran-
chise tax, or the insurance premium tax. The tax
credit essentially subsidizes the implementation
of commuter benefits, although it is broader
because the tax credits can also be used to offset
monthly, employee carpooling costs. Under
Federal law, any carpool expense reimbursements
are taxable, as they are  not considered qualified
transportation fringes under 26 USC 132(f). The
Maryland credit took effect July I, 1999 for tax-
able years beginning after December 31,  1999,

Also, effective July 1, 2000, the Maryland
Commuter Benefits Act of 2000 allows a credit
against specified state taxes for employers who
provide employees a parking cash out or a guar-
anteed ride home program. It also allows speci-
fied tax-exempt organizations to apply tax credits
allowed for employer-provided commuter bene-
fits as a credit against the payment of employee
withholding taxes and required to be paid to the
Comptroller. Finally, the Act also established
reporting requirements to help assess the success
of the program.

Georgia - Employers providing employees with
designated transportation fringe benefits, includ-
ing transit passes, transportation in a commuter
highway vehicle, and qualified parking, are eligi-
ble to receive an annual $25 tax credit for each
employee receiving a transportation fringe bene-
fit. The credit cannot exceed the amount of
money spent by the employer in providing the
benefit and the alternative method of transporta-
tion must be used at least 10 days per month. The
program  became effective January 1, 2001.

Minnesota - In Minnesota, tax credits can be
received  by employers who provide employees
with transit passes (for use in Minnesota only) for
transportation via either a public or privately
owned mass transit facility or by a person in the
business  of transporting people for compensation
or hire. Vehicles hired to transport employees
must seat at least six people (not including the
driver). The credit is equal to 30 percent of the
difference between what the employer pays for
the passes and what employees are charged for
the passes. The credit is nonrefundable and can
only be used in the current tax year. The types of
organizations eligible for the tax credit include C
corporations, S corporations, sole proprietors,
insurance companies, fiduciaries, and nonprofit
organizations.
State Tax Credits for Employer
Programs
Several states have implemented other types of
tax incentives to encourage employers to adopt
programs to encourage employees to commute to
work without using a single occupancy vehicle.
Many of these programs were passed prior to the
passage of TEA-21 and address a broad range of
transportation alternatives.

Delaware - Employers with approved Travelink
plans/programs can receive either a 10 percent
tax credit based on the direct cost of developing,
implementing, and maintaining a program, a •
credit based on the ratio of commuter trip reduc-
tions versus commuter trips generated, or a credit
of $250 per commute trip reduced (whichever
results in the smaller amount).

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                                    CCLI: Commuter Choice Tax: Benefits
 Connecticut - Employers in Connecticut with
 100 or more employees are eligible for a tax
 credit for any taxable year after January 1, 1997
 equal to 50 percent of the employer's direct costs
 for implementing a traffic reduction program, up
 to a limit of $250 per participating employee.
 Eligible programs must have been implemented
 after January  I, 1995. The total amount of credits
 available each year to corporations under this
 program is $1.5 million.

 Oregon - Under the Oregon Business Energy Tax
 Credit Program, employers can receive a tax
 credit equal to 35 percent of project costs for
 projects involving commute reduction, invest-
 ments in cleaner-fuel vehicles; participation In
 various conservation and renewable energy proj-
 ects and recycled materials markets; and involve-
 ment in the research and development of new,
 energy-efficient technologies. Eligible commute
 reduction programs must decrease work-related
travel by at least 25 percent and eligible costs
 include those  from telework programs, providing
transit passes, commuter pool vehicle arrange-
ments, financial incentive programs, bicycle proj-
ects, and transportation organization membership
dues. The credit is taken over five years, with 10
percent taken  the First and second year and 5 per-
cent taken in each subsequent year.

New Jersey -  The Smart Moves for Business Tax
Credit Program provides a tax credit to eligible
corporations equal to either 10 percent of the
costs attributed to implementing an authorized
commuter transportation benefits plan/report or
up to $115 per participating employee. For part-
nerships or limited liability corporations, the pro-
gram provides a tax credit of either 143 percent
of the costs attributed to implementing an author-
ized commuter transportation benefits plan/report
or up to $1,642 per participating employee. For
each type of employer, the tax credit is taken for
the smaller amount of the two calculations and
the employer decides to which tax the credit
applies.*

Sample Calculation of Tax Savings with a State
Tax Credit6

The following calculations illustrate the savings
of an employer in Maryland who provides Its
employees with up to $60 per month for transit
passe's. State tax. credits may reduce the amount
of federal tax savings, due to smaller federal
deductions for state taxes.
Monthly Cost of Transit Pass (per participating
employee)                  $60.00

Maryland State Tax Credit (50% of transit pass
cost)                       -$30.00

Total Business Expense      $30.00

Federal Corporate Income Tax Savings (at 34%
of $30 Business Expense)    -$10.20

Monthly Cost of Transit Pass to Employer
                            $19.80

Employers should discuss state tax credit impli-
cations with a qualified tax advisor.
'Recent proposals in the New Jersey's Genera! Assembly
could change the program's provisions. For example, certain
types of authorized plans could receive a tax credit equal to
15 percent of costs, instead of 10 percent. Proposed regula-
tions would also change the per employee tax limits, the
way tax credits to partnerships are calculated, and how the
tax credits are distributed between different types of taxes.
This example is based on an example and information
found in a brochure by ihe Maryland Department of
Transportation and Maryland Department of the
Environment calied "Maryland's New Commuter Tax
Credit."
                                                 10

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                                   CCLI: Commuter Choice Tax Benefits
Question: Are all employees eligible for quali-
fied transportation fringe benefits?

Yes. Any employee or group of employees can be
offered a qualified transportation fringe benefit.
The employer has the discretion to choose which
employees are offered the benefit and the amount
of the benefit can vary from employee to employ-
ee. There are only two restrictions on  who can
receive the qualified transportation fringe bene-
fits. First, it must be given only to employees
who will use it for their daily commute to and
from  work, and not for personal travel. Second,
individuals who are employed as partners in a
company, who are self-employed, or who are
more than two percent shareholders of a subchap-
ter S  corporation are not eligible.

Question: If I Implement a transit/vanpool bene-
fit program, am I required to offer the full value
of the benefits to my employee (e.g., $65 for
transit/vanpool programs and $180 for qualified
parking)?

No. An employer may provide benefits of any
amount or provide no assistance in the purchase
of vouchers.

Question:  WJtat if a monthly transit pass costs
$75 per month? Am I limited to providing a $65
benefit per month?

No. An employer may provide transit/vanpool
benefits of any amount. The tax-free benefit for
transit/vanpool benefits, however, is currently
limited to $65 per month. As a result,  the employ-
 'Questions and answers were based on information found at
 the following websites:
 www. Ra.doi. go v/11 brary/pol icy/tvbp. htm I,
 www.epa. gov/oms/transp/comchoic/faqs2 .htm, and
 tmi.cob.fsu,edu/act/f tool.htm
ee and employer must pay taxes on the vaJue of
the benefit that exceeds the $65 statutory limit
For example, if the employer provides the
employee with a monthly pass valued at S75 pet-
month, $65 is a tax-free fringe benefit,  and the
excess - S!0 - must be included in the employee's
wages for income and employment tax purposes.
Similarly, if the employer offers a pre-tax salary
deduction option, the employee may be allowed
to purchase a pass with a value of more than S65
per month. Then, $65 per month will be deducted
from the employee's wages for income  and
employment tax purposes. The remaining cost
will be included in taxable salary but be used  by
the employer to purchase the pass.

Question; How are benefits treated if an
employee terminates employment and the transit
passes cover multiple months?

In general, the value  of transit passes provided in
advance to an employee for a month in which the
individual is not an emplo3ree must be included in
the employee's wages for income tax purposes.
Transit passes distributed in advance to an
employee are excludable from wages for income
and employment tax  withholding purposes if the
employer distributes  transit passes to the employ-
ee in advance for not more than 3 months. At  the
time the passes are distributed, there cannot be an
established date that the employee's employment
will terminate (for example, if the employee has
given notice of retirement) occurring before the
beginning of the last  month of the period for
which the transit passes are provided.

Assume the employer distributes transit passes
quarterly, and the employee elects to have $195
deducted from salary to cover transit vouchers for
April, May, and June. If employment terminates
on May 31, and there was not an established date
of termination at the time the transit passes were
distributed, then the value of the transit passes
provided for June ($65) is excludable from the
employee's wages for employment tax purposes.
                                                II

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                                   CCLI: Commuter Choice Tax Benefits
However, the value of the transit passes distrib-
uted for June ($65) is not excludable from wages
for income tax purposes. If the employee's termi-
nation date was established at the time the transit
passes were provided, then the $65 is included in
the employees wages for both income and
employment tax purposes.

Question: Under what circumstances can an
employer offer benefits in the form of cash pay-
ments rather than using transit vouchers or
passes?

The tax code states that transportation reimburse-
ments must be made through transit vouchers or
passes, rather than cash payments, unless the
employer can show that vouchers or passes are not
"readily available," The January, 2001 IRS regula-
tions define the term "readily available" by stating
that only fees charged by transit voucher providers,
and non-financial restrictions on vouchers, could
be considered in  making a determination of vouch-
er availability, not internal administrative costs.
Passes are to be considered readily available if an
employer can obtain a pass on terms no less favor-
able than those available to an individual employ-
ee,  as long as the voucher provider does not charge
a fee in excess of one percent of the average annu-
al value of the voucher.

However, the "one percent" rule does not go into
effect until January 1, 2004. In the interim, the
previous standard that vouchers were not consid-
ered "readily available" if there were "significant
administrative costs" to the employer appears to
remain in effect.

In making a determination of voucher availabili-
ty, employers cannot consider internal costs, but
can include non-financial restrictions, such as
whether there are reasonable advance purchase
and minimum purchase requirements and whether
vouchers can be  purchased in appropriate denom-
inations. (Federal Register, 2001)
Internal administrative costs that cannot be con-
sidered in determining voucher availability
include expenses incurred by the employer to dis-
tribute the vouchers (i.e., if the employer chooses
to mail vouchers to employees, the postal fee
cannot be considered); any additional security
measures that must be taken to safeguard the
vouchers; expenses incurred to advertise the pro-
vision of transit vouchers; etc. Non-financial
restrictions that can be taken into consideration
include if a voucher provider does not make
vouchers available for purchase at reasonable
intervals or if the voucher provider fails to pro-
vide vouchers within a reasonable period after
receiving payment for the voucher.

   Example: Acme Corporation would like to
   provide a transit benefit up to $60 per month
   to all  employees who commute to work via
   subway. The local transportation management
   association (TMA) charges a 0.5% fee for pro-
   viding passes to employers. Because Acme
   does not have a central location where passes
   can be picked up, it will have to distribute the
   passes by sending them to employees via reg-
   ular mail on a monthly basis. This will cost
   the company approximately $1,000 per year in
   postal fees in addition to the cost of having a
   human resources employee prepare the
   envelopes, bring them to the post office, etc.

   To save money, Acme would prefer to provide
   cash reimbursements to employees rather than
   distribute the passes each month. Due to the
   requirements of the federal regulations, Acme
   is not allowed to do this. The only cost that
   Acme can take into consideration when decid-
   ing how to distribute the passes is how much
   the TMA charges for the vouchers. In this
   case, the passes are considered "readily avail-
   able" because the TMA charges less than one
   percent and therefore, Acme must purchase
   the vouchers instead of providing a cash
                                                 12

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                                  CCLI:  Commuter Choice Tax Benefits
   payment. The cost of distributing the passes
   via mail and personnel costs cannot be consid-
   ered because they are considered internal
   administrative costs. Note that the "one per-
   cent" rule does not take effect until January
   1, 2004.

Question: What are the typical internal adminis-
trative (and other) costs faced by employers who
implement commuter benefit programs?

The most common internal administrative costs
faced by employers who implement commuter
benefit programs include the cost of managing
the program on a day-to-day basis, marketing the
program to employees, distributing transit passes
or vouchers, etc. Other internal costs depend on
the type of program that the employer chooses to
establish. For example,, if an employer sets up a
vanpool program, then typical costs could include
the amount of money spent on purchasing or leas-
ing a commuter highway vehicle, finding and/or
training someone to drive the vehicle, and any
additional insurance expenses.

Question; Must a qualified transportation fringe
benefit plan be in writing?

No. The Internal Revenue Code does not require
that a transportation fringe benefit be in writing
or that any form of written plan be submitted to
the IRS. However, a company may wish to have
certain written rules in order to answer employee
questions and describe how the commuter benefit
program operates. For example, an employer
could write a plan that describes:

•  Which employees are eligible to receive
   transportation fringe benefits;

»  What benefits will be provided by the company;

•  How the company vanpool and guaranteed
   ride home programs operate; and

•  The procedure for enrolling in and discontinuing
   participation in the benefits program.
The company should not submit this plan to the
IRS, but should make it available to all employees.

Question: What are the payroll tax requirements
for qualified transportation fringes?

Qualified transportation fringes that do not
exceed the statutory monthly limit are not consid-
ered wages for purposes of the Federal Insurance
Contributions Act (PICA), the Federal
Unemployment Tax Act (PUTA), and federal
income tax withholding. Any amount by which
an employee elects to reduce compensation under
the limit is not subject to the PICA, the PUTA,
and federal income tax withholding. Qualified
transportation  fringes exceeding the applicable
statutory monthly limit are wages for purposes of
the PICA, the  FUTA,, and federal income tax
withholding and are reported on the employee's
Form W-2, Wage and Tax Statement. Also, cash
reimbursements to employees (for example, cash
reimbursement for qualified parking) in excess of
the applicable  statutory monthly limit are treated
as paid  for employment tax purposes when actu-
ally or constructively paid. Employers must
report and deposit the amounts withheld in addi-
tion to reporting and depositing other employ-
ment taxes. To receive payroll tax savings,
employees do  not have any additional paperwork
requirements beyond those normally performed
when filing taxes.
  |Jgglgjj^^
The Internal Revenue Code that governs employer-
provided commuter benefits is found at 26 USC
Section 132(f), and is available on the web at:
uscode.house.gov/usc.htm or
tmi.cob.fsu.edu/acf/f_benefit.htm

For more information relating to qualified trans-
portation fringes in Section 132(f), visit the
Internal Revenue Service (IRS) website at
www.irs.gov. This site contains useful informa-
tion for employers  regarding the tax treatment of
                                               13

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                                  CCLI: Commuter Choice Tax Benefits
fringe benefits. Some publications available from
the IRS that may be useful include:

*   Publication I5a, Employer's Supplemental Tax
    Guide - Section 6. Employee Fringe Benefits
    www.irs.gov/pro d/forms_pubs/pubs/pl5a08.htm.

»   Publication 15b, Employer's Tax Guide to
    Fringe Benefits - Transportation
    (Commuting) Benefits
    www.irs.gov/prod/forms_jpubs/pubs/pl5bQ21
    5.htm

*   Final Regulation Concerning Qualified
    Transportation Fringe Benefits (Issued
    January  11,2001)
    frwebgate.access.gpo.gov/egi-
    bin/getdoc.egi?dbname=2QQljregister&docid
    =01-294-filed.pdf
For more information relating to qualified trans-
portation fringes in Section 132(f), send a written
request to:

Freedom of Information Reading Room.
PO Box 795
Ben Franklin Station
Washington DC, 20044

Or contact Patricia Holtzworth at the IRS
at 202-622-6040.
                                               14

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                                  CCLI: Commute)- Choice Tax Benefits
                   ^
(f) Qualified transportation fringe

(1) In general

For purposes of this section, the term "qualified
transportation fringe" means any of the following
provided by an employer to an employee:

(A) Transportation in a commuter highway vehi-
cle if such transportation is in connection, with
travel between the employee's residence and
place of employment.

(B) Any transit pass.

(C) Qualified parking.

(2) Limitation on exclusion

The amount of the fringe benefits which are pro-
vided by an employer to any employee and which
may be excluded from gross income under sub-
section (a)(5) shall not exceed -

(A) $65 per month in the case of the aggregate of
the benefits described in subparagraphs (A) and
(B) of paragraph (1), and

(B) $175 per month in the case of qualified parking,

(3) Cash reimbursements

For purposes of this subsection., the term "quali-
fied transportation fringe" includes a cash reim-
bursement by an employer to an employee for a
benefit described in paragraph (1). The preced-
ing sentence shall apply to a cash reimbursement
for any transit pass only if a voucher or similar
item which may be exchanged only for a transit
pass is not readily available for direct distribu-
tion by the employer to the employee.
(4) No constructive receipt

No amount shall be included in the gross income
of an employee solely because the employee may
choose between any qualified transportation
fringe and compensation which would otherwise
be includible in gross income of such employee.

(5) Definitions

For purposes of this subsection -

(A) Transit pass. The term "transit pass" means
any pass, token, farecard, voucher: or similar item
entitling a person to transportation (or transporta-
tion at a reduced price) if such transportation is -

(i) on mass transit facilities (whether or not
publicly owned), or

(ii) provided by any person in the business of
transporting persons for compensation or hire if
such transportation is provided in a vehicle meet-
ing the requirements of subparagraph (B)(i),

(B) Commuter highway vehicle. The term "com-
muter highway vehicle" means any highway
vehicle -

(i) the seating capacity  of which is at least 6
adults (not including the driver), and

(ii) at least SO percent of the mileage use of
which can reasonably be expected to be -

(I) for purposes of transporting employees in con-
nection with travel between their residences and
their place of employment, and

(II) on trips during which the number of employ-
ees transported for such purposes is at least 1/2 of
the adult seating capacity of such vehicle (not
including the driver).

(C) Qualified parking. The term "qualified park-
ing" means parking provided to an employee on
                                                15

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                                   CCLI: Commuter Choice Tax Benefits
 or near the business premises of the employer or
 on or near a location from which the employee
 commutes to work by transportation described in
 subparagraph (A), in a. commuter highway vehi-
 cle, or by carpool. Such term shall not include
 any parking on or near property used by the
 employee for residential purposes.

 (D) Transportation provided by employer.
 Transportation referred to in paragraph (1)(A)
 shall be considered to be provided by an employ-
 er if such transportation is furnished in a com-
 muter highway vehicle operated by or  for the
 employer.

 (E) Employee. For purposes of this subsection, the
 term "employee" does not include an individual
 who is an employee within the meaning of sec-
 tion 401(c)(l).

 (6) Inflation adjustment

 (A) In general

 In the case of any taxable year beginning in a cal-
 endar year after  1999, the dollar amounts con-
 tained in subparagraphs (A) and (B) of paragraph
1  ~~"™"     t " "" "*"  * *   |   "r 'V'V ^.-l""-'?. ; ll' t~^ ^W-~l •
(2) shall be increased by an amount equal to -

(I) such dollar amount, multiplied by

(xi) the cost-of-Iiving adjustment determined
under section I(f)(3) for the calendar year in
which the taxable year begins, by substituting
"calendar year 1998" for "calendar year 1992".

(B) Rounding

If any increase determined under subparagraph
(A) is not a multiple of $5, such increase shall be
rounded to the next lowest multiple of $5.

(7) Coordination with other provisions

For purposes of this section, the terms "working
condition fringe" and "de minimus fringe" shall
not include any qualified transportation fringe
(determined  without regard to paragraph (2)).

Source: IRS  Tax Code (www.irs.gov).
                                                16

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                                   CCU:  Commuter Choice Tax Benefits
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The following calculations can be used to estimate an employer's tax savings from Implementing a com-
muter benefit program.

Option 1: Tox-Free Transportation Fringe Menefit

This section calculates the tax savings for employers who offer commuter benefits as an employer-paid,
transportation fringe benefit, compared to providing the same benefit as additional salary.

1.   Yearly Cost of Benefit Per Employee
    (i.e., the maximum amount the employer provides
    up to statutory limit)                                    	
2.  PICA rate (for participants below PICA wage base)        0.0765
3,  PICA Tax Savings per Participating Employee
    Line 1 x Line 2

4.  Number of Participating Employees

5.  Total PICA Tax Savings
    Line 3 x Line 4
Option 2: Pre-Tax Benefit

This section is for employers who allow employees to use pre-tax income to pay for qualified
commute expenses,

1.  Average amount of pre-tax income deducted from
    each participating employee (up to statutory limit)         	
2,   PICA rate (for participants below PICA wage base)         ,Q765_
3.   Average FICA Tax Savings per Participating Employee
     Line 1 x Line 2

4,   Number of Participating Employees

5.   Total FICA Tkx Savings
     Line 3 x Line 4
                                                 11

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                                  CCLI: Commuter Choice Tax Benefits
Option 3: Cost Sharing

Employers who share commute costs with participating employees can. calculate their tax savings using the
two options above. First, calculate the payroll tax savings from offering employees the tax-free benefit
rather than a salary increase. Second, calculate payroll tax savings from allowing employees to use pre-tax
income to pay for the benefit.
                                                18

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                                 CCLI: Commuter Choice Tex Benefits
Since the early 1990s, federal legislation and
actions have enabled and expanded the range of
commuter benefits that employers can offer their
employees. This section briefly describes the evo-
lution of the qualified transportation fringe bene-
fit program.

Pre-1992: Parking is Only Qualified
Transportation Fringe Benefit Prior to 1993,
parking was the  only transportation fringe benefit
specifically excluded under the federal tax code.
Transit passes were considered de minimus fringe
benefits, A de minimus benefit is a service or item
of such small value or provided so infrequently as
to make accounting for it impractical or impossi-
ble.  As a result, transit benefits were allowed to
be offered tax-free to employees as long as they
were of small value. The initial de minimus value
was  defined at $15 per month, 'which was later
adjusted to $21 per month. Vanpool benefits were
considered neither transportation fringe benefits
nor,de minimus benefits.

1992: Energy Policy Act of 1992 Expands
Qualified Transportation Fringe. In 1992,
Congress passed the Energy Policy Act of 1992
(Pub. L, No. 102-486), This Act was important in
that  it expanded the term qualified transportation
fringe to include transit passes and transportation
in commuter highway vehicles (i.e., vanpools) in
addition to qualified parking. As a result, it
allowed the employer, for the first time, to offer
vanpool benefits tax-free. It also allowed transit
passes to be provided to employees tax-free at a
higher value than allowed for a de minimus fringe.

The Act imposed a tax-free limit of $60 per
month on transit/vanpool benefits and $155 per
month for qualified parking. It provided an infla-
tion adjustment to these limits based on changes
in the consumer price index (CPI), with increases
to rise in increments of $5. In order to receive
tax-free status, all benefits were required to be
offered in addition to, and not in lieu of, salary.
The Act applied to benefits provided after
December 31, 1992.

1995: Tax-Free Limit on Traasit/Vanpool
Benefits Rises to $65 per Month. In accordance
with the inflation adjustment provisions of the
Energy Policy Act of 1992S the monthly tax-free
limit for commuter highway vehicle and transit
passes was raised from $60 to $65 for tax years
beginning in 1996.

1997: Taxpayer Relief Act of 1997. The Taxpayer
Relief Act of 1997 (Pub. L. No. 105-34) amended
the Federal tax code to allow qualified parking to
be provided to employees in lieu of salary begin-
ning December 31, 1997. As noted above, the tax
code previously stated that transportation fringe
benefits could not be taken in lieu of salary. As a
result, prior to 1998,, the tax code created a major
barrier for employers that wanted to offer their
employees cash in lieu of parking (parking cash
out): if they offered a choice of cash or parking, all
employer-provided parking would become taxable.
By allowing parking benefits to be taken in lieu of
salary, the Taxpayer Relief Act of 1997  allowed
employers to offer their employees the option of
accepting taxable cash income in lieu of a parking
space at work, while maintaining the tax-free sta-
tus of the parking benefit. The employer would
only have to pay taxes on the cash payment, not
the parking benefit.

1998: Transportation Equity Act for the 21st
Century (TEA-21), The Transportation Equity
Act for the 21st Century (Public Law 105-178),
which was enacted on June 9? 1998, amended the
Internal Revenue Code to allow any qualified
transportation fringe to be provided in lieu of
salary. Just as the Taxpayer Relief Act of 1997
allowed qualified parking benefits to be taken in.
lieu  of income, TEA-21 expanded this to also
allow transit pass and commuter highway vehicle
benefits to be taken in lieu of other monetary com-
pensation. The Act also raised the tax-free limit on
transit pass and commuter highway vehicle bene-
fits from $65 to $100 per month, starting in 2002.
                                                19

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                                   CCI7: Commuter Choice Tax Benefits
1999: Commuter Choice Initiative launched. In
1999, the federal government started the
Commuter Choice Initiative, As part of this, PTA
released the Commuter Choice Toolkit and the
U.S. Environmental Protection Agency, in collab-
oration with the U.S. Department of
Transportation, initiated the Commuter Choice
Leadership Program,

2001: Final Regulation:  Qualified
Transportation Fringe Benefits. On January 11,
2001, the Internal Revenue Service issued final
regulations concerning qualified transportation
fringe benefits and their excludability  from
employees' gross income. The regulations provide
rules to ensure that transportation benefits provid-
ed to employees are excludable from gross
income. These regulations provide clarification
regarding under what circumstances transporta-
tion fringes may be provided pursuant to a com-
pensation reduction agreement the ability to
carry over excess amounts to subsequent periods,
reporting requirements, and use of cash payments
rather than transit vouchers or passes.
                                               20

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 ORDERING
 This publication may be ordered from the National Service Center for Environmental Publications (NSCEP) at:
     U.S. Environmental Protection Agency
     NSCEP
     P.O. Box42419
     Cincinnati, OH 45242-2419
     Phone: (800)490-9198,  Fax: (513)489-8695


 FOR  MORE INFORMATION
 This guidance document and other information about the Commuter Choice Leadership Initiative are available
 at www.commuterchoice.gov or by calling the Commuter Choice voicemail request line at (888) 856-3131.


 ACKNOWLEDGEMENTS
 This document was prepared for EPA's Office of Transportation and Air Quality under contract 68-W6-0029, by
 Michael Grant and Liisa Ecola of ICF Consulting, 9300 Lee Highway, Fairfax, VA 22031, (703) 934-3000.

 We would like to thank the various reviewers who provided comments and feedback on the document.
RacyCWKRecycaWe Ported tM\ VfegetaUe Oil Based Wo on Recycled Paper (Minimum 50% PosKonsumeri Process Quofine free

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