Many
companies today purchase or lease vehicles that are 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. In most cases, this personal use is a taxable
fringe benefit, and employers are responsible for withholding
taxes on this benefit.
But this process is often complicated by the fact that 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. The rules can be complicated, and employers should
follow the guidelines provided in Internal Revenue Service Publication 15-B, Employer’s
Tax Guide to Fringe Benefits.
Taxability of the Personal Use of Company-Provided
Vehicles
The general rule for taxing
fringe benefits is that 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 (social
security and Medicare), 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.
Since it is a non-cash fringe benefit, the special accounting rule can be used
when taxing and reporting its value. So what is the special accounting rule?
The special accounting 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 2007, the employer can determine
the value of personal use for the period of November 1, 2006, to October 31,
2007.
It is important to remember that if an employer uses the special accounting
rule for one type of fringe benefit for one employee, it must use it for all
employees. And employers must also inform employees that 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.
Since 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: (1) the commuting rule, (2) the cents-per-mile
rule, and (3) the annual lease value.
Commuting Rule
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.
- 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. Control employees are defined in Publication 15-B.
Cents-Per-Mile
Rule
The
cents-per-mile rule is based on the IRS standard
mileage rate. For 2008, the standard mileage
rate is 58.5 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 5.5 cents per mile.
The use of this rule has a number of restrictive requirements:
- Maximum value – 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.
- Regular use in
your business – 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.
See the attached exhibit for an example calculation
using the cents-per-mile method.
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. (But let’s be reasonable. The net effect
is the same if we simply calculate the personal use of the vehicle, so that’s
what we will actually be doing.)
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.
See the attached exhibit for an example
calculation using the annual lease value method.
Conclusion
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.
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Robert W. Ditmer, CPP, is the owner of RWD Financial Support Service, located in Raleigh, North Carolina. Mr. Ditmer provides support and consulting services in the areas of bookkeeping, accounting, payroll and human resources. With over 25 years of experience Mr. 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. Mr. 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 rwdfinancial@yahoo.com.
