Personal Use of a Company Car
Don’t Let Tax Consequences Catch You Unaware
With many workers returning to the office and in-person meetings, and no shortage of deliveries of online orders, it’s a great time to review the rules around employee personal use of a company vehicle. Depending on the facts and circumstances, there could be unexpected tax consequences for both the employee and the employer.
A working condition benefit or a taxable fringe benefit. And while one vehicle can be used for both personal and business needs, for tax and legal purposes that vehicle is classified as one or the other: all business (100% business use) or all personal (if any portion of a business vehicle also is used for personal driving).
A working condition benefit is generally excluded from (not included in) an employee’s wages. To value a company vehicle that is considered a working condition benefit, the value is determined by the “availability” of the vehicle to the employee for the year. That value is determined based on selecting one of several valuation rules created by the IRS, and can get complex. Overall, if the company vehicle is used by the employee for solely business purposes, the employee’s wages remain unaffected and no taxable event will occur.
A taxable fringe benefit is not excluded from an employee’s wages – this means both the employee and the employer are required to pay payroll taxes on the value of the benefit. The employee is also subject to income tax. This event occurs when the company vehicle is used for personal use by the employee. The taxable amount is the value of the benefit that employee is receiving. Again, the way that value is calculated is very complex and is determined by the IRS valuation rules. Once the value of the benefit has been calculated, the amount of the taxable fringe benefit must be included in the employee’s W-2 wages. The IRS allows employers to choose the frequency in which these amounts are included in wages. It can be every pay period, quarterly, annually or any frequency in between as long as it is at least annually. The frequency does not have to be the same for all employees. There is no limit for how many times the frequency can be changed during the year but all benefits must be reported before year end.
Business vs. personal use
Business use of a vehicle includes travel from workplace to workplace, visiting clients, travel to business meetings away from your regular workplace, and travel to temporary workplaces.
Personal use of a vehicle includes travel between your home and workplace, and any other use that isn’t specifically for the business. Examples include hauling tools or instruments from home to work, or taking business calls while traveling between home and work.
Record keeping
Understanding what constitutes personal use and what is business use – and how to document them – is key to reducing the amount of benefit that is subject to taxes.
By default, the IRS treats all use of a company car by employees as taxable personal use. It is up to the employee and employer to prove what portion of use was business related and therefore a nontaxable working condition benefit. The IRS has strict rules about what record keeping is required to prove business use.
There are two things needed to prove business use: A written record, and documentation of the expense. A written record is a book, diary or log that states the amount, time, destination and business purpose of the expense. The amount includes both the costs of any expenses such as gas and tolls, and the mileage of the trip with the starting and ending odometer amounts. Documentary evidence includes receipts, canceled checks and bills. All these elements should be recorded without delay. The IRS doesn’t require instantaneous recording of expenses but does recommend at least weekly record keeping.
There are many software programs, apps and tips to help keep good records. The requirements for transportation and travel expenses may be more rigorous than normal business expenses but they don’t have to be a burden.
The extra work is worth the effort
There are three main things to consider if you have employees using company vehicles. Understanding the difference between personal and business use, picking the best valuation method for the vehicle, and keeping adequate records of the personal vs. business use of the vehicle and all related expenses. All three are needed to minimize the amount of benefit that is taxable to both the employer and the employee.
As overwhelming as it may seem at first, taking the time to find the best practices for your situation will save time, money and stress going forward. Luckily this isn’t a task you have to take on yourself. As needed, the JCCS team can help whether you are just starting to think about providing company cars or if you want to review the polices you already have in place.
* This article is not a complete listing of all the details related to this business / accounting topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.
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