Remote Employees’ Transportation and Travel to the Office: Taxable or Nontaxable?

Many businesses are now allowing employees great flexibility to choose their work location. A common work arrangement allows an employee to regularly work remotely (e.g., from their personal residence) and to work in the employer’s office as needed. Employers are asking whether the expenses incurred by the remote employee to travel to the office can be reimbursed on a tax-free basis. The answer hinges on whether the travel from the employee’s workplace in their personal residence to the employer-provided office is considered a personal commute or a business trip.

To be tax-free to the employee, amounts paid by an employer for travel from the employee’s personal residence to the employer’s office or another work location must meet the requirements of either a qualified transportation fringe (QTF) benefit or a working condition fringe benefit.
 

Qualified transportation fringe benefits

Commuting expenses provided to an employee are a tax-free benefit only if they satisfy Internal Revenue Code (IRC) Section 132(f). Under Section 132(f), employers can provide tax-free QTR benefits of up to a monthly limit ($280 for 2022) for each of the following:

• Transportation in a commuter highway vehicle between the employee's residence and place of employment,

• Any transit pass, or

• Qualified parking.

While commuting benefits are often provided as monthly parking contracts or transit passes, the QTF exclusion can be applied to ad hoc reimbursements with the required documentation.
 

Working condition fringe benefits

Many modes of transportation (i.e., personal auto, taxi, Uber, Lyft, airplane, etc.) are not considered a QTF but can still be provided tax-free to an employee as long as the benefit qualifies as a Section 132(d) working condition fringe benefit. A working condition fringe benefit is any property or service provided to an employee that the employee could deduct^[1] if they paid for the property or service. Whether a travel or transportation expense would be deductible by the employee requires a facts and circumstances analysis under a body of IRS and judicial guidance dating back to the 1940s focusing on the employee’s “tax home,” which does not address today’s widely accepted remote work arrangements. 

Employees who have one or more regular work locations away from their residence (such as the employer’s office) may deduct daily transportation expenses incurred in traveling between their residence and a temporary work location, regardless of the distance. When the employee’s primary work location is the employer-provided office, a drive to a customer (a temporary work location) directly from their personal residence is business mileage incurred for the benefit of the employer that can be reimbursed by the employer as a tax-free working condition fringe.

However, when an employee works primarily from their personal residence, different rules apply. The transportation expenses incurred in going between the residence and another work location (regular or temporary) in the same trade or business and within the same geographic area can be reimbursed tax free only if the residence is the employee’s “principal place of business” as defined by Section 280A(c)(1)(A). Among other requirements, this definition includes an “exclusive use” rule, which provides that the portion of the personal residence used by the employee for business purposes must be used exclusively on a regular basis for business purposes and must be used for the convenience of the employer (not for the convenience of the employee) based on the facts and circumstances.

 

1. The expense must be  reasonable and necessary, as these terms are generally understood;

2. The expense must be incurred while away from home; and

3. The expense must be incurred in pursuit of the employer’s business.

If all three of the above criteria are not satisfied, an employer’s reimbursement of an employee for the cost of the trip from a personal residence outside the geographic area in which the employer provides a workspace will be classified as personal commuting.

In its 1946 decision Commissioner v. Flowers^[2], the U.S. Supreme Court disallowed a deduction for travel expenses based on the criteria that the expense must be incurred in pursuit of the employer’s business, ruling that the employer gained nothing from the employee’s decision to reside in a different city. The Supreme Court found that the expenses were irrelevant to carrying on the employer’s business. Also see, Wilbert v. Commissioner (2009)^[3] and Tucker v. Commissioner (1976)^[4].  

For example, assume an employer allows an employee to work Monday and Friday from their home in Florida but requires them to be in the New York office Tuesday, Wednesday and Thursday. The employer does not require the employee to be in Florida. If the employer pays for the Florida to New York trips, the expense should be reported as taxable wages to the employee.
 

Lost Deductions for Employer

Generally, employers can deduct taxable wages paid to employees. However, the Tax Cuts and Jobs Act added IRC Section 274(l) Transportation and Commuting Benefits, which specifically disallows employer deductions for any expense incurred to provide transportation, or any payment or reimbursement for transportation, to an employee in connection with travel between the employee’s residence and place of employment, except as necessary to ensure the safety of the employee. Working condition fringe benefits avoid this disallowance, therefore a retroactive reclassification from treatment as a working condition fringe benefit to a commuting expense (whether taxable or nontaxable to the employee) could impact the employer’s income tax liability.  

 

How BDO Can Help

BDO professionals are ready to assist employers to determine the tax consequences of travel expenses of remote employees, including the analysis needed to determine each employee’s tax home, primary place of business, and travel away from home for business. For more information, contact BDO.