Tax Rules for Personal Use of a Company Vehicle

Dec 21, 2016

tax rules for personal use of a company vehicle

Free use of a company car is one of the best perks an employee may be entitled to as part of a compensation package. But the benefit to the employee isn’t completely “free” under current tax law. Essentially, personal use of a company car is treated as a taxable fringe benefit, subject to income tax withholding obligations by the employer. This process is often complicated by the complexity of the related tax rules for personal use of a company vehicle.

Company Vehicle Basics

Start with the premise that an employer providing a taxable fringe benefit to an employee is responsible for withholding federal income tax, FICA tax and FUTA tax based on the fair market value (FMV) of the benefit. This is generally reflected in the employee’s paychecks, but the FMV may be reduced by:

  • Any amount excluded from compensation by law; and
  • Any amount the recipient pays for the fringe benefit.

Because personal use of an employer-provided vehicle is a non-cash fringe benefit, the FMV must be determined at least once a year for tax purposes. However, an employer may chose to determine FMV on a monthly or quarterly basis.

To simplify tax reporting involving monthly valuations, the employer may use a special accounting rule that includes the value of a fringe benefit for the last two months of the calendar year with the value for the first ten months of the following year. For example, the monthly valuation of personal use of a vehicle will depend on the logs turned in by the employee. Thus, if a log is submitted for, say, November through December 2022, the employer can use it to determine the value of personal use for the period of November 1, 2022 to October 31, 2023.

If an employer uses this safe-harbor rule for one type of fringe benefit for one employee, it must use it for all employees. Furthermore, employees must be notified of the use of the special rule.

In some cases, an employer may provide company-owned vehicles to employees without requiring documentation of personal use. As a result, the entire FMV of the use of the vehicle must be included in the employee’s taxable compensation. The employee then has the option of deducting the business use of the vehicle on his or her Form 1040 (subject to other limitations).

Company Vehicle Valuation Methods

The IRS has established three primary methods of determining the FMV of the vehicle:

1. The Commuting Rule

This may be used if the sole personal use of an employer-provided vehicle is commuting back and forth from work. The value of each one-way commute is $1.50. This must be included in the employee’s taxable compensation or the employer can be reimbursed for this amount by the employee. The commuting rule method is the easiest one to administer because it doesn’t require employees to keep mileage logs of vehicle use,. However, it is available only if these requirements are met:

  • The employer provides the vehicle to the employee for use in the employer’s trade or business.
  • The employer has a written policy that does not allow the employee to use the vehicle for personal purposes, other than for commuting or “de minimus” personal use (for example, a trip to the dry cleaner’s between a business stop and arriving at home).
  • The employee in actuality does not use the vehicle for other personal purposes.
  • The employee is not a “control employee.”

2. The Cents-per-Mile Rule

This is based on the IRS standard mileage rate. Employees must either reimburse the employer at this rate for all personal miles driven in an employer-provided vehicle or the employer can add the value to the employee’s taxable compensation. If the employer doesn’t provide gasoline for the car, the rate may be reduced by no more than 5.5 cents per mile.

In addition, be aware that this rule has certain restrictions, as follows:

  • The value of the vehicle at the time it is made available to employees cannot exceed the maximum value established by the IRS each year. For 2016, the value cannot exceed $16,000 for a vehicle or $17,500 for a truck or van.
  • The vehicle must be used for business reasons for at least 50 percent of the annual mileage.
  • The vehicle must actually be driven at least 10,000 miles during the year (or proportionately if the vehicle is used less than a full year).
  • The vehicle must be used during the year primarily by employees.
  • The method must be used in subsequent years (absent any special circumstances).

Note: The cents-per-mile rate includes the value of maintenance and insurance. If the employee pays for these expenses, the value of the personal use is reduced based on receipts provided by the employee.

3. The Annual Lease Value Rule

This requires the employer to determine how much of the vehicle’s FMV can be excluded from the employee’s income as a working condition fringe benefit. In other words, the employer must calculate the FMV of the vehicle and the FMV of the business use of the vehicle to establish the difference as the amount of the taxable fringe benefit.

According to the IRS, the FMV based on IRS tables must be determined on the first date a vehicle is available for use by an employee. Once the annual lease value is set, the employer must determine the percentage of the vehicle’s use that is personal, based on mileage logs.

Note: The annual lease value does not include the cost of gasoline. An employer can either determine the value of personal use based on the fair market value of gasoline, if it provides it, or at a rate of 5.5 cents per mile. If an employee doesn’t keep mileage records, the entire lease value, plus gasoline costs, is taxable to the employee.

Company Vehicle as an Attraction and Retention Tool

A company-provided car is still a viable option for attracting and retaining key employees. But it’s important to address all the payroll tax complexities relating to the personal use of a vehicle. With assistance from GTM’s payroll, employers can adhere to the tax law guidelines and meet all the reporting requirements. Please contact us for more information.

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