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IRS Issues Guidance on Exclusion for Employer-Provided Transit Smartcards.
(Parker Tax Publishing December 9, 2014)

The IRS has provided guidance on when smartcards or similar electronic media used to purchase transit fares may be excluded as transportation fringe benefits. Key factors are whether the cards are restricted to purchasing only fare media, and whether suitable substantiation procedures exist for those that are not restricted. Rev. Rul. 2014-32.

In 2006, the IRS issued Rev. Rul. 2006-57 addressing the use of smartcards, debit cards, or other electronic media to provide employees with transportation fringe benefits, and included illustrations of four situations. Because terminal-restricted debit cards were not widely used when Rev. Rul. 2006-57 was issued, the IRS acknowledged that it lacked the factual information needed to develop comprehensive guidance. Rev. Rul. 2006-57 provided that, in the interim, the IRS would not challenge the ability of employers to provide qualified transportation fringes in the form of cash reimbursement for transit passes when the only available voucher or similar item was a terminal-restricted debit card. Rev. Rul. 2014-32 modifies and supersedes Rev. Rul. 2006-57.

The new ruling includes examples of eight different scenarios designed to illustrate whether employer-provided transportation benefits provided through electronic media (i.e. transit smart-cards) are excluded from gross income under Code Secs. 132(a)(5) and 132(f). The examples include scenarios where the provided electronic media can only be used to purchase transit fares, where media can be used at merchants that provide goods and services other than transit fares, and the effects of different reimbursement programs. In all scenarios the amount of the fringe benefits were within the statutory limits.

Section 132(a)(5) provides that any fringe benefit that is a qualified transportation fringe is excluded from gross income. Section 132(f)(1) provides that the term "qualified transportation fringe" means (1) transportation in a commuter highway vehicle between home and work, (2) any transit pass, and (3) qualified parking. Section 132(f)(2) provides a monthly limit on the amount of the fringe benefit which may be excluded from income.

Sections 132(f)(5)(A) and 1.132-9(b), Q/A-3 provide that a transit pass is any pass, token, farecard, voucher or similar item entitling a person to transportation (or transportation at a reduced price) if such transportation is on mass transit facilities or is provided by any person in the business of transporting persons for compensation or hire in a commuter highway vehicle.

Under Reg. Sec. 1.132-9(b) Q/A-16(c), whether a reimbursement is made under a bona fide reimbursement arrangement depends upon the facts and circumstances. The employer must implement reasonable procedures to ensure that the amount equal to the reimbursement was incurred for transportation in a commuter highway vehicle, transit passes, or qualified parking.

In the scenarios where the fare media value stored on the smartcards is usable only as fare media for a particular transit system, or where a terminal-restricted debit card is issued that may only be used at merchant terminals for which only fare media for local transit systems can be purchased, the IRS determined these qualify as a transit passes and may be excluded from gross income and from wages without requiring substantiation.

In the scenarios where employers provide debit cards restricted for use with merchants assigned a merchant category code (MCC) indicating that the merchant sells fare media, but might also sell other merchandise, the IRS determined these do not qualify as transit system vouchers because it was possible they may be used to purchase items other than fare media and are thus not excludable as fringe benefits. However, if the employer implements reasonable substantiation procedures for reimbursement for the use of the debit cards, amounts spent on fare media are excludable.

This substantiation requirement is clearly illustrated by Situation 4 in Rev. Rul. 2014-32:

Example: An employer provides its employees with MCC-restricted debit cards as soon as they begin work. Prior to using his or her card, an employee must certify that it will be used only to purchase fare media. However, the employees are not required to substantiate their fair media expenses. This does not constitute a bona fide reimbursement arrangement because it provides for advances rather than reimbursements and because it relies solely on employee certifications provided before the expense is incurred. Those certifications, standing alone, do not provide the substantiation necessary for there to be a bona fide reimbursement arrangement.

Finally, beginning after December 31, 2015, employers will no longer be permitted to provide qualified transportation fringe benefits in the form of cash reimbursement in geographic areas where a terminal-restricted debit card is readily available. Whether terminal-restricted debit cards are readily available must be determined under the standards in Sec. 1.132-9(b) Q/A-16(b)(5) and (b)(6). (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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