I’ve been trying to figure out for a while exactly where the tax law says that employers can deduct more for parking fringe benefits than they can for mass-transit fringe benefits. A bit of digging just answered my question, thanks to the IRS’s guide to fringe benefits for employers. That guide points us to Cornell’s law archive, oddly enough; why can’t the IRS archive the laws that govern it?
Specifically, employer fringe benefits are defined within Title 26, Subtitle A, Chapter 1, Subchapter , Part III, Section 132, Subsection (f), Subsubsection (2), to wit:
(2) Limitation on exclusion
The amount of the fringe benefits which are provided by an employer to any employee and which may be excluded from gross income under subsection (a)(5) shall not exceed—
(A) $100 per month in the case of the aggregate of the benefits described in subparagraphs (A) and (B) of paragraph (1), and
(B) $175 per month in the case of qualified parking.
I would still like to figure out why the parking benefit is higher than the mass-transit benefit. It’s not as though mass transit always costs less than $100 per month: I could very easily spend $250 per month shuttling back and forth to Newburyport or Providence. In any case, the tax-law documentation itself doesn’t explain the reason behind the policy.
At work, they asked us what fringe benefits would be useful to us. I suggested
that perhaps they spend some money to equalize the parking and mass-transit benefits:
pay us $75, or the excess of our mass-transit expense over $100, whichever is smaller.
Which is a nice teachable math moment, for those who are interested. Suppose I incur $200 in
mass-transit expenses in a month, so my company reimburses me $175. I owe taxes on $75 of that,
because the government only lets my company deduct $100. Suppose I’m in the 28% tax bracket;
that means I owe $21 in taxes on the $75. But the people who receive the parking benefit don’t
need to pay $21 in taxes. So a company committed to fairness would also reimburse me for that
$21. That’s $21 in additional income, on which I would then be taxed. I’d owe $5.88 in taxes,
specifically (again, 28%). So my fairness-minded company would reimburse me $5.88.
And so forth, ad infinitum. In total, the company would reimburse me
$75 + $21 + $5.88 + $1.6464 + $0.460992 + $0.12907776 + …
This is known as a geometric series, with ratio .28. It has a finite sum, namely
$75/(1-.28) = $75/.72 = $104.17. My company needs to reimburse me $104.17 to
give me the same benefit that car drivers already get.
An easier way to arrive at the same conclusion is like so:
my company needs to pay me $x to equal the parking benefit.
I will be taxed 28% on those $x. So after taxes, I will have
$(1-.28)x in the bank. I want my after-tax benefit to equal
the $75 that parking users get.
So I want (1-.28)x = 75, whence x = 75/(1-.28). Different route,
My company didn’t think quite as much of my idea as I did. Nice
geometric series, though.