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.
Personal use of employer-provided vehicles is a non-cash fringe benefit, so its value must be determined at least once a year. In general, the FMV of an employer-provided vehicle is the amount the employee would have to pay a third party to lease the same or similar vehicle on the same or comparable terms in the geographic area where the employee uses the vehicle. A comparable lease term would be the amount of time the vehicle is available for the employee’s use, such as a 1-year period.
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.
Valuing personal use of company owned autos
An employer can value an employee’s use of a company car based on what it would cost the employee to lease a comparable car. Since this is usually impractical, three special valuation methods are available to employees.
|Availability of Special Valuation Methods|
|Annual Lease Value||Commuting Value||Cents per Mile|
|Car provided to control employee||OK||Can’t Use||OK|
|Car’s FMV over $15,000 ($15,200 for light trucks and vans) in 2009||OK||OK||Can’t Use|
|Non-de minimus personal use other than commuting||OK||Can’t Use||OK|
|Car driven less than 10,000 miles/year||OK||OK||Can’t Use|
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 employee. A control employee of a nongovernment employer for 2009 is generally any of the following employees.
- A board or shareholder-appointed, confirmed, or elected officer whose pay is $95,000 or more.
- A director.
- An employee whose pay is $195,000 or more.
- An employee who owns a 1% or more equity, capital, or profits interest in your business.
Highly compensated employee alternative. Instead of using the preceding definition, you can choose to define a control employee as any highly compensated employee. A highly compensated employee for 2009 is an employee who meets either of the following tests.
- The employee was a 5% owner at any time during the year or the preceding year.
- The employee received more than $105,000 in pay for the preceding year.
You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year.
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 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. For 2009, that value for a car is $15,000 and is $15,200 for a truck or van.
- Regular use in the 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
- You must begin using the cents-per-mile rule on the first day you make the vehicle available. However, if you use the commuting rule, you can change to the cents-per-mile rule on the first day for which you do not use the commuting rule.
- You must use the cents-per-mile rule for all later years in which you make the vehicle available, except that you can use the commuting rule for any year during which use of the vehicle qualifies under the commuting rules. However, if the vehicle does not qualify for the cents-per-mile rule during a later year, you can use for that year and thereafter any other rule for which the vehicle then qualifies.
Annual Lease Value Rule
Generally, you figure the annual lease value of an automobile as follows.
- Determine the fair market value (FMV) of the automobile on the first date it is available to any employee for personal use.
- Using the Annual Lease Value Table, read down column (1) until you come to the dollar range within which the FMV of the automobile falls. Then read across to column (2) to find the annual lease value.
Annual Lease Value Table
|(1) Automobile FMV||(2) Annual Lease|
|$0 to 999||$ 600|
|1,000 to 1,999||850|
|2,000 to 2,999||1,100|
|3,000 to 3,999||1,350|
|4,000 to 4,999||1,600|
|5,000 to 5,999||1,850|
|6,000 to 6,999||2,100|
|7,000 to 7,999||2,350|
|8,000 to 8,999||2,600|
|9,000 to 9,999||2,850|
|10,000 to 10,999||3,100|
|11,000 to 11,999||3,350|
|12,000 to 12,999||3,600|
|13,000 to 13,999||3,850|
|14,000 to 14,999||4,100|
|15,000 to 15,999||4,350|
|16,000 to 16,999||4,600|
|17,000 to 17,999||4,850|
|18,000 to 18,999||5,100|
|19,000 to 19,999||5,350|
|20,000 to 20,999||5,600|
|21,000 to 21,999||5,850|
|22,000 to 22,999||6,100|
|23,000 to 23,999||6,350|
|24,000 to 24,999||6,600|
|25,000 to 25,999||6,850|
|26,000 to 27,999||7,250|
|28,000 to 29,999||7,750|
|30,000 to 31,999||8,250|
|32,000 to 33,999||8,750|
|34,000 to 35,999||9,250|
|36,000 to 37,999||9,750|
|38,000 to 39,999||10,250|
|40,000 to 41,999||10,750|
|42,000 to 43,999||11,250|
|44,000 to 45,999||11,750|
|46,000 to 47,999||12,250|
|48,000 to 49,999||12,750|
|50,000 to 51,999||13,250|
|52,000 to 53,999||13,750|
|54,000 to 55,999||14,250|
|56,000 to 57,999||14,750|
|58,000 to 59,999||15,250|
For automobiles with a FMV of more than $59,999, the annual lease value equals (.25 × the FMV of the automobile) + $500.
- 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.
- The annual lease values in the table are based on a 4-year lease term.
Withholding and Depositing Taxes
You can add the value of fringe benefits to regular wages for a payroll period and figure income tax withholding on the total. Or you can withhold federal income tax on the value of fringe benefits at the flat 25% rate that applies to supplemental wages.
Paying your Employee’s Share of Social Security and Medicare Taxes
If you choose to pay your employee’s social security and Medicare taxes on taxable fringe benefits without deducting them from his or her pay, you must include the amount of the payments in the employee’s income. Also, if your employee leaves your employment and you have unpaid and uncollected taxes for noncash benefits, you are still liable for those taxes. You must add the uncollected employee share of social security and Medicare tax to the employee’s wages.
Special Accounting Rule
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, 2008, to October 31, 2009.