Federal tax law allows taxpayers to exclude from income “qualified transportation fringe benefits.” Included in this category of benefits are van pools
There are three types of van pools for federal tax purposes:
- Employer-operated van pool. In an employer-operated van pool, the employer either purchases or leases vans to enable employees to commute together to the employer’s place of business or the employer contracts with and pays a third party to provide the vans and pays some or all of the costs of operating the vans.
- Employee-operated van pool. In an employee-operated van pool, the employees, independent of their employer, operate a van to commute to their places of employment.
- Private or public transit-operated van pool. In a private or public transit-operated van pool, public transit authorities or a person in the business of transporting persons for compensation or hire owns or operates the van pool.
Not all vehicles are treated the same for purposes of federal tax rules. A “commuter highway vehicle” is a vehicle that has a seating capacity of at least six adults (not including the driver). Additionally, at least 80 percent of the mileage use can reasonably be expected to be:
- For transporting employees between their residences and their place of employment
- Used on trips during which the number of employees transported for such purposes is at least 50 percent of the adult seating capacity (not including the driver)
These requirements are commonly called the “80/50 rule.” The IRS has explained that the 80/50 rule does not require that the employee use the van pool at least 50 percent of the time. Rather, the 80/50 rule requires that riders in the van pool fill at least 50 percent of the adult seating capacity, not including the driver.
Van pools that are employer-operated and employee-operated must comply with the 80/50 rule, the IRS has explained. If they do not, then riders risk losing any tax benefits. The 80/50 rule does not apply to private or public transit-operated van pools; however, they are subject to other requirements.
Note. Many factors may come into play in determining if a van pool is an employer-operated, employee-operated or private/public transit authority van pool. These factors include who determines the route the van takes as well as who determines the boarding and discharge times and locations. Keep in mind that employers have significant leeway in designing a vanpool program. An employer may offer, for example, a guaranteed ride home option, which is not a requirement under the federal tax laws. Please contact our office for more details about van pooling and federal tax benefits.