Improving the Commuting Disallowance Rule

The Tax Cuts and Jobs Act (TCJA), signed into law at the end of 2017, made such far-reaching changes to the tax code, including modifying deductions for business aircraft, that the rulemaking process is still underway.

For example, to pay for other tax changes, the TCJA created a disallowance for employer deductions of employee commuting expenses, and the IRS recently issued final regulations.

Before the TCJA, employers could generally deduct certain commuting benefits provided to employees, a common practice for many companies that own business aircraft. Since business aircraft are utilized to reach airports with little or no commercial air service, commuting flights are inevitable, so NBAA and its Tax Committee carefully analyzed the provision.

In comments to the IRS and Department of the Treasury, NBAA explained that proposed regulations on the commuting disallowance could inadvertently limit deductions for legitimate business travel between places of employment.

For example, the IRS proposed disallowing employer deductions for travel originating at a “transportation hub” near the employee’s residence or place of employment. This confusing concept could have treated legitimate business travel between places of employment as commuting, and NBAA suggested eliminating it.

The IRS agreed, and the final rule eliminates the transportation hub concept. The IRS also explained that travel between the employee’s residence and place of employment is not affected by using different modes of transportation, as commuting that is subject to the disallowance always begins from the employee’s residence.

The proposed rule also explained that if commuting expenses are necessary for ensuring the employee’s safety, the disallowance of employer deductions does not apply. In its comments on the proposed rule, NBAA asked the IRS to clarify which standard should apply for this exception and suggested it should apply based on relevant facts regarding the employee’s security, such as risk of kidnapping or dangers due to the pandemic.

The final rule confirmed that a more general standard applies relating to the employee’s specific security concerns. Also, the existing standard for a security study to determine if a business-oriented security concern exists should meet the IRS’s more general standard. As many companies utilize business aircraft as part of a comprehensive security plan, this clarification will provide additional flexibility.

Finally, NBAA continues to follow up with the IRS and Treasury Department on commuting benefits that the employer reports to the employee as a taxable benefit (i.e., including it in the employee’s Form W-2). Before passage of the TCJA, commuting flights were deductible by the employer as the cost of providing a compensation fringe benefit. Unfortunately, the final rules do not provide clarity on this topic.

In a follow-up memo to the IRS, NBAA explained that disallowing employer deductions when income is imputed to the employee is double taxation, which is inconsistent with congressional intent.

Under current tax law, if an employer provides in-kind compensation to an employee, such as paying the employee’s personal, family or living expenses, it generally is entitled to a compensation deduction. NBAA believes the same standard should exist for commuting expenses and will continue to seek guidance on the matter.

Review NBAA’s tax resources at nbaa.org/taxes.