Tax-Law Changes That Can Save You Money

Congress, at press time, had not enacted legislation that will reduce retailers' 1999 tax liability. Some changes in the tax laws, resulting from legislation passed in prior years, became effective this year and can reduce their 1999 tax liability if retailers seize the moment. The major impact is on employers who provide their employees with a subsidy for their commuting expenses.

The Transportation Equity Act for the 21st Century (TEA-21) contains provisions that enable retailers and other employers to provide a new fringe benefit to employees who commute to work. This benefit can be offered in addition to an employee's base salary, or can be offered "in lieu of compensation."

This benefit works like a flexible spending account for medical or dependent-care expenses. Before the start of each plan year, eligible employees can elect to set aside a certain amount of pretax salary for covered commuting costs. The maximum now is $65 per month for mass-transit expenses and $175 per month for parking expenses. Separate accounts must be maintained for each category, and the accounts cannot be commingled. As employees incur commuting expenses during the year, they submit requests for reimbursement. If there is any money left over in an employee's account at the end of the year, it is refunded to the employee the following year.

Prior to the passage of TEA-21, businesses could provide employees tax-free transit and van-pool transportation fringe benefits that were excludable from gross income (i.e., not taxable to the employee) only if these benefits were provided in addition to the employee's compensation. Employers could not offer this benefit (on a tax-free basis) to employees instead of a portion of their wages. That meant that if you wanted to provide this benefit to your employees, it entailed an additional expense. Although this additional expense was ? and continues to be ? fully tax deductible, it still meant more money out of your pocket. Well, now that's all changed.

TEA-21 allows employees to pay their "qualified transportation expenses" (commuting expenses), with pretax dollars through an employer-provided plan that you can set up. That means you can now offer your employees transit and van-pool benefits instead of compensation. TEA-21 gives transit and van pool benefits the same tax treatment that parking benefits currently receive. Parking benefits are excludable from an employee's gross income and are not taxable when they are provided instead of wages (i.e., purchased with pretax dollars), thanks to the Taxpayer Relief Act of 1997. This new benefit began on Jan. 1, 1999.

Eligible expenses include payments for the use of mass transportation such as train, subway or bus, and for parking. The maximum monthly contribution for mass transit is $65, and $175 for parking. These amounts will be indexed for inflation in future years and the $65 maximum for mass transit will go up to $100 in 2002.

Covered parking expenses include: parking in a facility near the place of work, or parking at a location such as a bus or train station, from where the employee commutes to work. Eligible mass-transit expenses include costs of any pass, token, fare card, voucher or other item that entitles the employee to use mass transit to commute to or from work.

This benefit is only for employees. Employees and officers of corporations are eligible but sole proprietors, partners, independent contractors and 2-percent shareholders of S corporations are not. There are no nondiscrimination requirements. If your business is incorporated and you are an employee of the corporation, you are entitled to these benefits. Ditto for members of your family employed by the corporation.

Employees do not owe any federal income tax or Social Security (FICA) tax on amounts they set aside for eligible commuting expenses. Depending on state law, they may also avoid state and local income taxes on these amounts. The federal tax savings for employees can be as much as 35.65 percent (28 percent federal tax plus 7.65 percent FICA). Amounts set aside by employees for eligible commuting expenses are not subject to the employer portion of Social Security taxes or unemployment taxes. By encouraging employees to take advantage of this provision, they save and so do you. It's a win-win situation.

An employee's future Social Security benefits may be slightly lower because the amounts set aside for commuting costs are not subject to FICA tax. In most cases, this reduction will be negligible.

A recent development may have a positive impact on commuting expenses. A revised IRS definition of the term "temporary workplace" may enable retailers and/or their employees to deduct certain business transportation expenses. Under existing law, if one is self-employed, the cost of transportation between home and a work location is tax deductible only if the home is the principal place of business. If you are an employee, the cost of temporarily traveling to a work location other than your normal work location is a tax-deductible employee business expense.

Previously, the IRS defined the term "temporary workplace" as a workplace where services were performed on an irregular or short-term basis. Now, the IRS has defined a temporary work location to mean any work location that is expected to last for up to a year but not longer. The implications of this changed definition are as follows:

If you are self- employed, the cost of transportation between your residence and a temporary business location outside the metropolitan area in which you live and work is tax deductible. If, for example, you open a new convenience store outside of the metropolitan area in which you live, your transportation expenses to that new convenience store are tax deductible for up to a year.

Under the IRS ruling, the cost of transportation between your residence and a temporary location within your metropolitan area is tax deductible if your residence is your principal place of business or you have one or more regular work locations away from your residence.

Assuming you don't have a convenience store in your home, the IRS ruling means that transportation expenses between your residence and multiple convenience stores you own that are located within the same metropolitan area are tax deductible.

The cost an employee incurs traveling to a temporary work location as now defined is a tax-deductible business expense. For example, if an operator opens up a new convenience store and asks an employee to work there for say, three months, to train new employees, the employee's travel expenses to the satellite location are tax-deductible employee business expenses. If the operator reimburses employees for auto expenses when traveling between business locations at the business mileage rate (31 cents per mile), that reimbursement is not taxable income to the employee. These provisions apply to employees of owner-incorporated businesses.

For business property placed in service in 1999, owners can elect, for regular tax purposes, to compute depreciation on tangible personal property that would ordinarily qualify for the "200 percent declining balance method" alternative depreciation system by using the 150 percent declining balance method over the recovery periods applicable to the regular tax system. The result: depreciation of the property over a shorter period of time. This change was part of the 1998 IRS restructuring bill.

While somewhat arcane, the change could be important, particularly to startup businesses. It gives business owners another depreciation option. The 200-percent method provides for rapid depreciation in the early years, but that may not be advantageous if a business has operating losses. It may make more sense to save the depreciation deductions for later years, particularly if taking large depreciation deductions results in an alternative minimum tax problem. Discuss this option with your tax adviser to determine whether the change will benefit you.



Milton Zall is a freelance writer based in Silver Spring, Md., who specializes in taxes, investments and business issues. He is a Certified Internal Auditor and a Registered Investment Advisor. He can be reached by telephone at (301) 649-6044 or via e-mail at miltzall@pop.dn.net