Question: What are the rules surrounding tax-free bicycle commuting expense reimbursement?

Compliance Team Response:

Overview

The ability for employers to reimburse employees tax-free for bicycle expenses related to commuting was added to the Internal Revenue Code in 2009.

The key limitations are:

1. Employee contributions are not permitted (must be exclusively an employer giveaway program); and

2. Employees who participate are not eligible to participate in any other commuter benefits (mass transit/vanpooling/parking).

Qualifying Expenses

A qualifying bicycle commuting reimbursement is:

• For reasonable expenses;

• Incurred for the purchase, improvement, repair, or storage of a bicycle;

• That is regularly used for travel between the employee’s residence and place of employment;

• If the reimbursement is paid during the calendar year in which the expenses are incurred or during the first three months after that calendar year.

Limit on Benefits

The tax-free §132 limit is $240 per calendar year (determined by multiplying $20 by the number of “qualified bicycle commuting months” the employee has during the calendar year).  Any reimbursement in excess of the limit will be taxable income to the employee.

Qualified Bicycle Commuting Months

Employees are eligible for the $20 benefit for any month that is a “qualified bicycle commuting month,” which requires:

1. During that month the employee used the bicycle for a substantial portion of the travel between the employee’s residence and place of employment; and

2. For that month the employee did not receive any other qualified transportation fringe benefit (mass transit/vanpooling/parking).

No Pre-Tax Salary Reduction Option

Unlike the other qualified transportation fringe benefit options under §132 (mass transit/vanpooling/parking), there is no option for employees to make pre-tax contributions for bicycle expenses.  This means that qualified bicycle commuting reimbursements can only be paid for by the employer.

Regulations:

IRC §132(f)(1):

(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 vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.

(B)  Any transit pass.

(C)  Qualified parking.

(D)  Any qualified bicycle commuting reimbursement.

IRC §132(f)(4):

(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 (other than a qualified bicycle commuting reimbursement) and compensation which would otherwise be includible in gross income of such employee.

IRC §132(f)(5)(F)(iii):

(F)  Definitions related to bicycle commuting reimbursement.

(i)  Qualified bicycle commuting reimbursement. The term “qualified bicycle commuting reimbursement” means, with respect to any calendar year, any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.

(ii)  Applicable annual limitation. The term “applicable annual limitation” means, with respect to any employee for any calendar year, the product of $20 multiplied by the number of qualified bicycle commuting months during such year.

(iii)  Qualified bicycle commuting month. The term “qualified bicycle commuting month” means, with respect to any employee, any month during which such employee—

(l)  regularly uses the bicycle for a substantial portion of the travel between the employee’s residence and place of employment, and

(ll)  does not receive any benefit described in subparagraph (A) , (B), or (C) of paragraph (1).