To ensure adequate transportation to and from work and other business destinations, some employers provide their employees company-owned or leased vehicles.  Generally, if a business owner believes that providing an employee with a car or truck will add productivity or security to business operations, the owner may decide that purchasing or leasing a vehicle is worth the costs. Here is what employers should know about providing company vehicles to their employees.

2017 Values for Vehicles Provided by Employers

If an employer provides an employee with a vehicle that is available to the employee for personal use, the value of the personal use must generally be included in the employee’s income and wages. If the employer meets certain requirements, the employer may elect to determine the value of the personal use using certain special valuation rules, including the fleet-average value rule and the vehicle cents-per-mile rule set forth in Regulation Section 1.61–21(d) and (e), respectively.

Both the vehicle cents-per-mile rule and the fleet-average value rule provide that those rules may not be used to value personal use of vehicles that have fair market values exceeding specified maximum vehicle values on the first day the vehicles are made available to employees. These maximum vehicle values are indexed for inflation and must be adjusted annually.

• The maximum value of employer-provided vehicles first made available to employees for personal use in the calendar year 2017 for which the vehicle cents-per-mile valuation rule provided under Regulation Section 1.61–21(e) may be applicable is $15,900 for a passenger automobile and $17,800 for a truck or van.
• The maximum value of employer-provided vehicles first made available to employees for personal use in the calendar year 2017 for which the fleet-average valuation rule provided under Regulation Section 1.61–21(d) may be applicable is $21,100 for a passenger automobile and $23,300 for a truck or van.

The Employer-Provided Car as a Fringe Benefit         

You should use the following general valuation rule to determine the value of most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value.

Fair market value

The fair market value (FMV) of a fringe benefit is the amount an employee would have to pay a third party in an arms-length transaction to buy or lease the benefit. Determine this amount on the basis of all the facts and circumstances. Neither the amount the employee considers to be the value of the fringe benefit nor the cost you incur to provide the benefit determines its FMV.

Employer-provided vehicles

In general, the FMV of an employer-provided vehicle is the amount the employee would have to pay a third party to lease the same or similar vehicle on the same or comparable terms in the geographic area where the employee uses the vehicle. A comparable lease term would be the amount of time the vehicle is available for the employee’s use, such as a 1-year period.

Working Condition Benefits

This exclusion from taxes applies to property and services you provide to an employee so that the employee can perform his or her job. It applies to the extent the employee could deduct the cost of the property or services as a business expense or depreciation expense if he or she had paid for it. The employee must meet any substantiation requirements that apply to the deduction. Examples of working condition benefits include an employee’s use of a company car for business and job-related education provided to an employee.

This exclusion also applies to a cash payment you provide for an employee’s expenses for a specific or prearranged business activity for which a deduction is otherwise allowable to the employee. You must require the employee to verify that the payment is actually used for those expenses and to return any unused part of the payment.

For information on deductible employee business expenses, see Unreimbursed Employee Expenses in Publication 529, Miscellaneous Deductions.

Vehicle allocation rules

If you provide a car for an employee’s use, the amount you can exclude as a working condition benefit is the amount that would be allowable as a deductible business expense if the employee paid for its use. If the employee uses the car for both business and personal use, the value of the working condition benefit is the part determined to be for the business use of the vehicle. See Business use of your car under Personal versus Business Expenses on page 5 of IRS Publication 535.

Business Use Deductions

If an individual uses a car in his or her job or business and uses it only for that purpose, the individual may deduct its entire cost of operation (subject to certain limits). However, if the individual uses the car for both business and personal purposes, he or she may deduct only the cost of its business use.

• You can generally figure the amount of a deductible car expense using one of two methods: the standard mileage rate method or the actual expense method.
• If you qualify to use both methods, before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction. Please refer to Publication 463, Travel, Entertainment, Gift and Car Expenses, for the current standard mileage rate.
• If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.

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Source: “Company Vehicles” from Zywave