Generally, the value of a
company car is a fringe benefit which an employee must
include in income as compensation. However, if the use of the company car qualifies as a nonpersonal-use vehicle, the value
of the company car is excluded from an
employee’s income.
Definitions
• Working Condition Fringe Benefit: A
working condition fringe benefit is any employer-provided property or service that
could be deducted as an "employee business expense" if paid
directly by the employee. Thus, only the value of the nonbusiness use of a
company car is taxable compensation to an employee.
• Employee: The
following persons are considered employees for purposes of determining
whether the value of a company car may be excluded as a
working condition fringe benefit:
1) Any individual currently employed by
that employer,
2) Any partner performing services for the partnership,
3) Any director of the employer, and
4) Any independent contractor performing services for the employer.
• Qualified Nonpersonal-Use Vehicles: All
use of a qualified nonpersonal-use company car qualifies as a working
condition fringe benefit and, therefore, 100% of the value of that use is excluded
from income. A qualified nonpersonal-use company car is any vehicle that is
not likely to be used more than minimally for personal purposes because of
the way it is designed.
Qualified nonpersonal-use company cars include:
1) Clearly marked police and fire vehicles,
2) Unmarked vehicles used by law enforcement officers if the use is
officially authorized,
3) Ambulances used as such,
4) Hearses used as such,
5) Any vehicle that is designed to carry cargo with a loaded gross vehicle
weight over 14,000 pounds,
6) Delivery trucks with seating for the driver only, or for the driver
plus a folding jump seat,
7) Passenger buses used as such with a capacity of at least 20 passengers,
8) School buses, and
9) Tractors and other special purpose farm vehicles.
Taxable Valuation Of Personal Use of
Company Car
General Valuation Principle: In
general, the value of the availability of an employer-provided company car
is
the amount an unrelated third party would charge a person to obtain (lease
or purchase) the same or a comparable vehicle on the same or similar terms
in the geographical area in which the company car is available for use. The
amount is then allocated between business and personal use, with only the
personal-use portion included in the employee’s gross income.
Benefits Provided in November and
December: Benefits provided in November and December may be treated as
paid in the following year. If an employer is unable to determine the
actual value of benefits provided to an employee by the January 31
deadline for issuing Form W-2, the value of benefits provided in November
and December (or any shorter period) may be added to the benefits for the
following year.
Special Valuation Rules "Safe
Harbor": There are three (3) valuation rules for valuing the use
or availability of an employer-provided company car.
1) Lease Valuation Rule: Using
special IRS tables, this method provides a safe-harbor shortcut of the
general valuation principle. For leased autos, the employer may use the auto’s
retail price less 8%, or a nationally recognized pricing source such as
"The Blue Book." In addition, an employer may use the
manufacturer’s invoice price plus 4% as the FMV. When using the
"Annual Lease Value" table, the FMV (as determined on the first
day the auto was made available to an employee) is used for four years.
After four years, the auto is revalued and the new value is then used for
the next four years [Reg. §1.61-21(d)(2)(iv)]. The taxable benefit is
computed by multiplying the employee’s personal-use portion by the
appropriate table amount. The value of any employer-provided fuel must
also be added as a taxable benefit. Fuel may be valued either at its FMV
or at 5.5¢ per mile.
—Prorated Annual Lease Value: The
annual lease value is prorated if an employee is provided a vehicle for
continuous periods of 30 or more days, but less than the entire year. The
prorated value is computed by multiplying the applicable annual lease
value by a fraction, using the number of days of availability as the
numerator and 365 as the denominator.
—Daily Lease Value: If
an employee is provided with a vehicle for less than 30 days, the daily
lease value must be used. The daily lease value is computed by multiplying
the applicable annual lease value by a fraction, using four times the
number of days of availability as the numerator and 365 as the
denominator.
2) Cents-Per-Mile Valuation Rule: The
employer values the taxable benefit by multiplying the employee’s
personal miles by the current standard mileage rate. Up to 5.5¢ per mile
may be subtracted if the employer did not provide fuel. Business miles
must be substantiated and subtracted from total miles to determine
personal miles. The cents-per-mile method is only available for valuing
personal use and cannot be used when an employer is treating 100% of auto
use as personal.
To qualify for use of this rule, the
company car must be:
• Used at least 50% in the employer’s
trade or business through-out the calendar year (or such shorter period as
the company car may be owned or leased), or
• Generally used each workday to transport at least three employees in
an employer-sponsored commuting pool, or
• Driven at least 10,000 miles in that year and used primarily by
employees. The company car is considered to be used primarily by employees if
employees use it consistently for commuting even if all miles driven are
personal.
• Company car must not be a "luxury vehicle." For tax year 1999, a
vehicle is a "luxury vehicle" if FMV exceeds $15,500 at the time
it is first made available.
3) Commuting Valuation Rule: The
value of commuting use of an employer-provided company car is $1.50 per
one-way commute or $3.00 round-trip per employee.
Requirements that must be met in order to
use the commuting valuation rule:
• Employer must own or lease the company
car which is provided to one or more employees in the employer’s trade or
business.
• Employer must have a bona fide noncompensatory business reason
to require an employee to commute to and/or from work.
• There must be a written policy under
which the employee is not allowed to use the company car for personal
purposes, other than for commuting or de minimis personal use.
• Except for de minimis personal use,
employee does not use the company car for any personal purpose other than
commuting.
• Employee may not be a control employee
which is defined as a director; or an owner of more than 1%
equity, capital, or profit interest in the employer.
Recordkeeping Requirements
An employee may not exclude from income any
portion of the value of an employer-provided company car and may
not deduct the business use of an employer-provided company car unless the use is substantiated by records.
The records should contain:
• Date of each company car use.
• Mileage.
• Business purpose of the trip.
• For travel outside tax home area, a
description of destination, business purpose, benefit derived, etc.
• Total company car mileage for the year.
Records must be kept at or near the time of
the use. If there are no written records, the employee may provide a
statement containing specific information related to the company car’s use or may provide other corroborative evidence sufficient to
establish use. However, without written records, IRS may disallow
the exclusion-from-in-come status of the employer-provided company car.
Reporting Employee Company Car Personal Use On Business Tax Returns
When the personal use of a company car is
included in an employee’s wages as taxable compensation, the employer
recovers the cost of the company car as if it were used entirely for
business purposes. Form 4562, Part V, Section A, on the employer’s tax
return shows business-use percentage as 100%.
