When are transportation expenses deductible?

Most workers and employers know that you generally can’t deduct the cost of commuting between home and work — that’s considered a personal expense. But there are certain situations in which commuting costs are deductible as transportation expenses.

When commuting isn’t commuting

In some instances, you may deduct the expense of traveling between your residence and a work location. IRS Revenue Ruling 99-7 permits it under three circumstances:

1. The worker travels between his or her home and a temporary work location that is outside the metropolitan area where the taxpayer lives and normally works. This exception recognizes that it would be unreasonable to expect a worker to relocate his or her principal residence for a short-term job.

2. The worker travels between his or her home and a temporary work location, regardless of distance, and the worker has one or more regular work locations away from his or her home. This exception might apply, for example, to a consultant who sometimes travels directly from home to a client’s site.

3. The worker travels between his or her home and a temporary or regular work location and the home qualifies as the worker’s principal place of business. For example, a consultant who works out of his or her home and travels to client sites (temporary locations) while also renting conference space away from home (a regular location).

A key consideration for the first two exceptions is the meaning of “temporary work location.” Notably, a job assignment of indefinite duration isn’t considered temporary.

According to the ruling, absent facts and circumstances that indicate otherwise, a work site is temporary if employment there “is realistically expected to last (and does in fact last) for one year or less.” However, if a job is initially expected to last one year or less but that expectation changes during the course of the job, it’s treated as temporary until the date it becomes evident that the job will last more than one year.

Transportation as a fringe benefit

Qualified transportation fringe benefit programs offer tax benefits for both employers and employees. Employers that provide workers with transit passes, vanpool services or parking at or near the office or a mass-transit facility can deduct the expense while excluding the benefits from employees’ wages (subject to the limits discussed below).

Qualified parking benefits can be provided in the form of a noncash benefit (such as the free use of a pay parking lot) or a taxable reimbursement of up to $230. This same cash reimbursement is also available for vanpool services or mass transit (or a combination of the two).

You’re eligible to take advantage of both the parking and mass-transit/vanpool benefits, which would be applicable if, for instance, you had to pay to park at a commuter train station and also had to pay for the cost of taking the commuter train. If you do not participate in either of the benefits and use your bicycle to commute, you may be eligible for a $20 monthly benefit.

The road to tax savings

In the current economic crisis, every little bit of savings helps. So it pays for businesses and employees to become familiar with tax benefits that can help soften the blow of rising transportation costs. The benefits described above are subject to various rules and restrictions, so be sure to consult your tax advisor before acting. •