Personal Use of Company Cars
Automobiles furnished to employee(s): I have several clients who own a corporation and the corporation has purchased an automobile for the President/employee’s use (both business and personal). This includes business miles driven as well as personal mileage, including commuting miles driven from the home to the office each day. The employer or the corporation can deduct the full cost of operating the vehicle. However, any personal use of the vehicle is considered a taxable fringe benefit and must be included in the employee’s Form W-2 at year end.
What Constitutes Personal Use? Personal use of an employer-provided vehicle is any use that is not in the employer’s trade or business. This includes commuting from home to work. A mileage log must be kept for both personal and business use.
Valuation of the Fringe Benefit: The amount included in an employee’s wages for income and employment tax purposes resulting from personal use of an employer-provided vehicle is determined by the fair market value of its availability. The methods that can be used are 1) the annual lease valuation method, 2) the cents-per-mile method (this method cannot be used if the auto’s fair market value, as of the date first made available to an employee for personal use, exceeds annually-adjusted amount)( For 2018 $15,600 for Autos and $17,600 for Trucks and Vans); and 3) the value of the commuter use of an employer-provided car (this method cannot be used for “control employees,” certain owner-employees, higher-paid employees or directors). Valuation of personal use of a car under one of these “safe harbor” rules will be accepted by the IRS if the rule is applied properly.
The following are tow ways to calculate the valuation of the Fringe Benefit:
1. Annual Lease Value Method of Valuing Use: A car’s annual lease value is based on the fair market value of the car when it is first available for personal use and is determined under the annual lease value table provided by the IRS and reproduced in IRS Publication 15-B. The table amount includes maintenance and insurance but does not include employer-provided gasoline. That must be added at the fair market value of the fuel or 5.5 cents per mile, times the personal miles put on the vehicle. The amount added to wages from the table would be the personal percentage of the car (based on miles driven), times the table amount.
For a partial year, the amounts are prorated. Since the IRS table is based on a four-year lease, after four years with the same vehicle, additional rules apply. Once you start with one method, you keep using that valuation method as long as you still own that car.
Employer’s Tax Reporting Obligations: Whenever an employer provides a car for an employee’s personal use, it is generally required to:
Example: A small corporation is 100% owned 100% by Joe Smith. He is the president and his corporation has provided him with a company car in 2018. The value of that car when the corporation bought it was $20,000 including all taxes and licenses. He uses the car both for business and personal use and the corporation pays for all expenses related to the car. His total miles put on the car for the year were 12,000 and he kept track of all business trips, which totaled to 8,400 miles or 70% business usage in 2018. The corporation deducts 100% of the automobile expenses, depreciates 100% of the automobile and calls the portion put into the owners W-2 “Wages”. If the personal use by the more than 5% owner is more than 50%, the automobile must be depreciated using the straight line method and it is ineligible for expensing and the bonus first-year depreciation.
Joe’s corporation must use the annual lease valuation method since his car was valued higher than the $15,600 “Luxury Auto Threshold” in 2018 when he started using it. According to the “Annual Lease Value Table for Automobiles”, the annual lease value on a $20,000 vehicle is $5,600. This amount is multiplied by Joe’s personal usage of the car or 30%. The amount that must be picked up as income is $1,680. This includes the maintenance and insurance but in addition to this, the corporation must add 5.5 cents for each of the personal 3,600 miles driven. This adds an additional $198 to the $1,680, which must be included in Joe’s income for 2018. The total amount of $1,878 must be added to Joe’s final W-2 for 2018. In order to make this simpler, the employer (Joe) has elected not to withhold any income taxes from this amount. (If Joe is in the 24% tax bracket, he will probably have to come up with about $451 in additional income taxes when he sends in his tax return). The employer must withhold Social Security and Medicare taxes of 7.65% (or $144) on the total amount of $1,878. This amount could be withheld from the employee’s last paycheck for the year, or both halves paid in by the employer. The half that should have been withheld from wages will be called a dividend by the corporation to the employer.
2. Cents-Per-Mile Method:
Under this rule, you determine the value of a vehicle you provide to an employee for personal use by multiplying the standard mileage rate by the total miles the employee drives the vehicle for personal purposes. Personal use is any use of the vehicle other than use in your trade or business. This amount must be included in the employee's wages or reimbursed by the employee. The business mileage rate for 2018 is 54.5 cents per mile.
You can use the cents-per-mile rule if either of the following requirements is met.
Example: Joe Smith, an employee, has access to a company-provided car. He drives 1,000 personal miles in 2018. To get the fair market value of Joe’s personal use, multiply his personal miles by 54.5¢.
1,000 personal miles X $0.545 = $545.00
The company will include $545.00 in Joe’s wages as the fair market value of his company-provided vehicle use.
Should you have further questions as to how to handle this complex payroll matter, feel free to call me.
This article was written by Nancy K. Phillips, CFP®, CPA and/or her staff. It is intended to provide you with an informative summary of current business, financial and/or tax planning news. Do not apply this general information to your specific situation without additional details and/or professional assistance.
What Constitutes Personal Use? Personal use of an employer-provided vehicle is any use that is not in the employer’s trade or business. This includes commuting from home to work. A mileage log must be kept for both personal and business use.
Valuation of the Fringe Benefit: The amount included in an employee’s wages for income and employment tax purposes resulting from personal use of an employer-provided vehicle is determined by the fair market value of its availability. The methods that can be used are 1) the annual lease valuation method, 2) the cents-per-mile method (this method cannot be used if the auto’s fair market value, as of the date first made available to an employee for personal use, exceeds annually-adjusted amount)( For 2018 $15,600 for Autos and $17,600 for Trucks and Vans); and 3) the value of the commuter use of an employer-provided car (this method cannot be used for “control employees,” certain owner-employees, higher-paid employees or directors). Valuation of personal use of a car under one of these “safe harbor” rules will be accepted by the IRS if the rule is applied properly.
The following are tow ways to calculate the valuation of the Fringe Benefit:
1. Annual Lease Value Method of Valuing Use: A car’s annual lease value is based on the fair market value of the car when it is first available for personal use and is determined under the annual lease value table provided by the IRS and reproduced in IRS Publication 15-B. The table amount includes maintenance and insurance but does not include employer-provided gasoline. That must be added at the fair market value of the fuel or 5.5 cents per mile, times the personal miles put on the vehicle. The amount added to wages from the table would be the personal percentage of the car (based on miles driven), times the table amount.
For a partial year, the amounts are prorated. Since the IRS table is based on a four-year lease, after four years with the same vehicle, additional rules apply. Once you start with one method, you keep using that valuation method as long as you still own that car.
Employer’s Tax Reporting Obligations: Whenever an employer provides a car for an employee’s personal use, it is generally required to:
- Report the value (as computed above) of the employee’s personal use of the car as income on his Form W-2. This can be added to the other income received during the year or a separate W-2 may be issued.
- Withhold income tax on the value of the fringe benefit using a flat rate; a 22% rate for 2018. An employer may elect not to withhold income tax if the employer notifies the employee and includes the value of the personal use of the car on the employee’s W-2.
- Withhold and pay employment tax (FICA and FUTA), where applicable, on the value of the fringe benefit.
Example: A small corporation is 100% owned 100% by Joe Smith. He is the president and his corporation has provided him with a company car in 2018. The value of that car when the corporation bought it was $20,000 including all taxes and licenses. He uses the car both for business and personal use and the corporation pays for all expenses related to the car. His total miles put on the car for the year were 12,000 and he kept track of all business trips, which totaled to 8,400 miles or 70% business usage in 2018. The corporation deducts 100% of the automobile expenses, depreciates 100% of the automobile and calls the portion put into the owners W-2 “Wages”. If the personal use by the more than 5% owner is more than 50%, the automobile must be depreciated using the straight line method and it is ineligible for expensing and the bonus first-year depreciation.
Joe’s corporation must use the annual lease valuation method since his car was valued higher than the $15,600 “Luxury Auto Threshold” in 2018 when he started using it. According to the “Annual Lease Value Table for Automobiles”, the annual lease value on a $20,000 vehicle is $5,600. This amount is multiplied by Joe’s personal usage of the car or 30%. The amount that must be picked up as income is $1,680. This includes the maintenance and insurance but in addition to this, the corporation must add 5.5 cents for each of the personal 3,600 miles driven. This adds an additional $198 to the $1,680, which must be included in Joe’s income for 2018. The total amount of $1,878 must be added to Joe’s final W-2 for 2018. In order to make this simpler, the employer (Joe) has elected not to withhold any income taxes from this amount. (If Joe is in the 24% tax bracket, he will probably have to come up with about $451 in additional income taxes when he sends in his tax return). The employer must withhold Social Security and Medicare taxes of 7.65% (or $144) on the total amount of $1,878. This amount could be withheld from the employee’s last paycheck for the year, or both halves paid in by the employer. The half that should have been withheld from wages will be called a dividend by the corporation to the employer.
2. Cents-Per-Mile Method:
Under this rule, you determine the value of a vehicle you provide to an employee for personal use by multiplying the standard mileage rate by the total miles the employee drives the vehicle for personal purposes. Personal use is any use of the vehicle other than use in your trade or business. This amount must be included in the employee's wages or reimbursed by the employee. The business mileage rate for 2018 is 54.5 cents per mile.
You can use the cents-per-mile rule if either of the following requirements is met.
- You reasonably expect the vehicle to be regularly used in your trade or business throughout the calendar year (or for a shorter period during which you own or lease it).
- The vehicle meets the mileage test.
- It is actually driven at least 10,000 miles in that year; and
- It is used during the year primarily by employees.
- You must begin using the cents-per-mile rule on the first day you make the vehicle available to any employee for personal use.
- You must use the cents-per-mile rule for all later years in which you make the vehicle available to any employee and the vehicle qualifies
- You must continue to use the cents-per-mile rule if you provide a replacement vehicle to the employee (and the vehicle qualifies for the use of this rule) and your primary reason for the replacement is to reduce federal taxes.
Example: Joe Smith, an employee, has access to a company-provided car. He drives 1,000 personal miles in 2018. To get the fair market value of Joe’s personal use, multiply his personal miles by 54.5¢.
1,000 personal miles X $0.545 = $545.00
The company will include $545.00 in Joe’s wages as the fair market value of his company-provided vehicle use.
Should you have further questions as to how to handle this complex payroll matter, feel free to call me.
This article was written by Nancy K. Phillips, CFP®, CPA and/or her staff. It is intended to provide you with an informative summary of current business, financial and/or tax planning news. Do not apply this general information to your specific situation without additional details and/or professional assistance.