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 (the employer) 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 2009, 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 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 2009, the standard mileage rate is 55 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.

The following example provides the payroll administrator some guidance about how to include the peronal use of the employer provided vehicle on the employees W-2.

Assumptions:

• Vehicle purchase price: $12,500
• Total mileage vehicle driven between 11/1/08 to 10/31/09*: 18,500
• Total personal usage from mileage logs: 7,800
• All gasoline purchased with company credit card
• Employee pays for insurance: $1,800 per year
• Value to be taxed at supplemental wage tax rate (25%)

Calculation of Employee Cost:

• Calculate value of personal use. (7,800 mi x $0.55/mi = $4,290.00)
• Subtract expenses paid by employee to calculate total value of personal use. ($4,290.00 - $1,800.00 = $2,490.00)

Calculation of Taxes:

• Federal income tax. ($2,490.00 x 25% = $622.50)
• Social security tax. ($2,490.00 x 6.2% = $160.58)
• Medicare tax. ($2,490.00 x 1.45% = $36.11)

Reporting of Fringe Benefit (if taxes withheld from employee’s paycheck):

• Add $2,490.00 to totals in Boxes 1, 3 and 5 of W-2.
• Add $622.50 to total in Box 2 of W-2.
• Add $160.58 to total in Box 4 of W-2.
• Add $36.11 to total in Box 6 of W-2.
• Add $2,490.00 to total on Line 1 of Part I of Form 940

*Please note that the employer in this case has chosen to use the special accounting rule for this particular fringe benefit. This enables the employer to include the value of the benefit in the employee’s wages before the end of the tax year so the taxes can be withheld from the employee’s regular pay.

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.