Is the value of a transit pass excludable from employee’s income?


Your company provides annual Smart Cards to your full-time and part-time employees for use with the local transit authority. These allow employees to ride on all parts of the transit authority’s buses and rapid transit systems. Can the employees exclude the value of the Smart Card from their gross income?


Yes, the IRS concluded in a letter ruling. Because the card is a transit pass under Internal Revenue Code Sec. 132(f)(5)(A), an employee will be able to exclude the monthly fair market value of the card, up to the statutory monthly limit, from his or her gross income.

Calculating the card’s value. For purposes of determining if the card’s value exceeds the monthly limit, 1/12 of the value of the annual card is attributable to each month for which it is valid. If the card is deactivated for any employee who ceases to be eligible for the card, the value of the card would not be included in the employee’s gross income or wages for the months during which it was deactivated. The scenario above was addressed by the IRS to apply only to the particular facts set forth in the letter ruling, but it helps clarify how the IRS perceives taxation of Smart Cards.

Source: IRS Letter Ruling 201532016, April 30, 2015; Employee Benefits Management Newsletter, 597, November 3, 2015.

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