Article written by:
Michael Cobetto, CPA
Providing vehicles to employees can be a great benefit for both the employee and employer; however, the tax reporting can often be complicated. Here are a few general items to consider:
Defining Personal vs. Business Use:
Business use of a company car is defined as using the vehicle to perform any job-related duty. On the other hand, personal use of a company car is anything non-business related (including commuting between a personal residence and work location). In order to substantiate business vs. personal use, detailed records of mileage, date and destination should be maintained by the employee. If detailed records are not maintained, the entire value of the use of the vehicle could be taxable to the employee.
Reporting Personal Use:
If there is personal use of a company car, the IRS considers this a non-cash fringe benefit that is taxable to the employee (and generally deductible by the employer). Similar to any other non-cash benefit, the IRS requires that you calculate the fair market value of the benefit and include it on the employee’s W-2. There are a few different methods that can be used to accomplish this, detailed below:
- Lease Value Rule – Under this rule, the fair market value is determined by its annual lease value starting with the first day the vehicle is available to the employee for personal use. The annual lease value is multiplied by the personal use percentage in order to determine the income inclusion (Note: if the lease is not for an entire year, amounts should be prorated). Additionally, $0.055 per mile multiplied by the personal miles driven should be included as income to the employee only if fuel is provided by the employer.
- Cost-Per-Mile Rule – Under this rule, the total miles driven for personal purposes is multiplied by the standard mileage rate to determine the income inclusion. You can use this method if the vehicle is expected to be used regularly for trade or business, driven at least 10,000 miles a year, and the vehicle does not exceed the IRS maximum automobile values ($15,900 for a passenger automobile or $17,800 for a truck).
- Commuting Rule – Lastly, this rule can be used only if a written policy exists restricting personal use of the vehicle (other than de minimis personal use), it is used primarily for trade or business, and the employee is not a “highly-compensated” individual. The income inclusion is $1.50 per one-way commute multiplied by number of commutes for the calendar year.
If you are considering providing vehicles to employees for personal use, keeping appropriate records and policies are crucial. If you would like more information, please contact us.