Many companies today purchase or lease vehicles used by employees in the course of doing business. However, in many cases employees are allowed by employers to use these vehicles for personal use. This personal use is a taxable fringe benefit, and employers are responsible for withholding taxes.
This process is often complicated by the fact the fair market value of a vehicle is not determined by the actual cost of the vehicle. It is determined by calculating how much an employee would have to pay to lease a comparable vehicle in an arms-length transaction.
Taxability of the Personal Use of Company-Provided Vehicles
The general rule for taxing fringe benefits is all fringe benefits are taxable to the recipient based on the fair market value (FMV), and the provider of the benefit is responsible for withholding federal income taxes, FICA taxes, and FUTA taxes. The taxes may be withheld from the recipient’s cash compensation. The fair market value of the fringe benefit may be reduced, however, by the following amounts:
- Any amount that the law excludes from compensation; and
- Any amount that the recipient pays for the benefit.
Personal use of employer-provided vehicles is a non-cash fringe benefit, so its value must be determined at least once a year. The FMV of the benefit is subject to tax withholding at the time the value is determined by the employer. It may be added to the employee’s regular compensation and the necessary taxes withheld from the employee’s regular compensation. Some employers may choose to determine the FMV more frequently, such as monthly.
Because it is a non-cash fringe benefit, the special accounting rule can be used when taxing and reporting its value. This rule allows an employer to include 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. Why might an employer do this? In the case of some fringe benefits an employer may not be able to determine the value of the benefit until after the end of a month. For instance, an employer might not be able to determine the value of personal use for a company-provided vehicle until after the employee turns in his mileage logs in the following month. So using mileage logs turned in during November 2010, the employer can determine the value of personal use for the period of November 1, 2009, to October 31, 2010.
It is important to remember if an employer uses the special accounting rule for one type of fringe benefit for one employee, it must be used for all employees. And employers must also inform employees they are using the special accounting rule because the employees must also use the special accounting rule if the employer elects to use it.
Some employers may provide company-owned vehicles to employees without requiring the employee to document personal use. In such cases, the entire FMV of the vehicles must be included in the employee’s income. The employee has the option of calculating and deducting the business use of the vehicle on his personal Form 1040.
Because the fair market value (FMV) of a company-provided vehicle is not dependent on the actual cost of the vehicle, the IRS has provided three primary methods of determining the FMV of the vehicle: the commuting rule, the cents-per-mile rule, and the annual lease value.
If the only personal use of an employer-provided vehicle is commuting to and from work, then the employer can use the commuting rule. The value of each one-way commute is $1.50, and either the value has to be included in the employee’s wages or the employee can reimburse the employer this amount.
The commuting rule is the easiest method to use because it does not require employees to keep mileage logs of vehicle use, and it is the easiest for employers to administer. However, employers can use this rule only if four requirements are met:
The employer provides the vehicle to the employee for use in the employer’s trade or business. Notes:
- 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 (such as a stop for a personal errand on the way between a business delivery and the employee’s home).
- The employee in reality does not use the vehicle for personal purposes.
- The employee is not a control employee.
The cents-per-mile rule is based on the IRS standard mileage rate. For 2016, the standard mileage rate is 54 cents a mile. Employees must either reimburse the employer at this rate for all personal miles driven in an employer-provided vehicle, or the value will be added to the employee’s taxable income. If the employer does not provide the fuel for the car, the rate can be reduced by 3.5 cents per mile.
The use of this rule has a number of restrictive requirements:
- 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.
- The vehicle must be used for business reasons for at least 50% of the annual mileage.
- Mileage test:
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).
- Employee use:
The vehicle must be used during the year primarily by employees.
- Consistency requirements:
The method must be used for later years except for specific circumstances outlined in Publication 15-B.
The cents-per-mile rate includes the value of maintenance and insurance. If the employer does not pay for maintenance and/or insurance and the employee is required to cover those costs, the value of the personal use is actually reduced by the expenses incurred by the employee, as long as the employee provides actual receipts.
Annual Lease Value
Using the annual lease value method is different from the other methods because instead of calculating the employee’s personal use of the vehicle, the IRS rules state that the employer has to calculate how much of the vehicle’s FMV can be excluded from the employee’s income as a working condition fringe benefit. In other words, calculate the FMV of the vehicle, calculate the FMV of the business use of the vehicle, and then calculate the difference as the taxable fringe benefit.
According to the instructions on page 20 of Publication 15-B, the FMV has to be determined on the first date it is available for use by an employee. Use the IRS-provided table to determine the annual lease value.
Once the annual lease value has been determined, the employer must determine how much of the vehicle’s use is personal. If the vehicle is used by the employee for both business and personal use, the employee must keep mileage logs indicating how the car was used. The personal use value is based on the percentage of use.
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 (which is possible if the employer provides all gasoline) or at the rate of 5.5 cents per mile.
If an employee does not keep mileage records, then the entire lease value, plus gasoline costs, is taxable to the employee.
In order to conduct business in today's competitive economic market, many companies must provide transportation for their employees. Instead of bearing the cost of storing and maintaining these vehicles, companies can have employees maintain the vehicles, and in turn employees are allowed to use the vehicles for personal use. But it is important for these companies to remember that such use is a taxable fringe benefit, and employers must withhold income taxes on the value of this personal use. If employers follow the guidelines presented above, then they will be able to determine the value of such personal use as well as comply with all taxing and reporting requirements.
Robert W. Ditmer, CPP, is the owner of RWD Financial Support Service, located in Raleigh, North Carolina. Ditmer provides support and consulting services in the areas of bookkeeping, accounting, payroll and human resources. With over 25 years of experience Ditmer has worked in a wide variety of industries, and he worked as a Controller in four different businesses including a land planning/landscape architecture firm in Philadelphia, PA, a private dining and catering facility in Wilmington, DE, an IT support company in Glastonbury, CT, and a commercial construction management firm in Columbia, MD. Ditmer has also spoken at conferences and provided training on various issues, and he has written a number of articles in the field of payroll and payroll taxation. He is a member of the American Institute of Professional Bookkeepers and the American Payroll Association, and qualified as a Certified Payroll Professional in 2000. He can be reached at firstname.lastname@example.org.