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You’ve Been Provided with Free Identity Theft Protection. Is it Taxable?

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Identity theft occurs when a person wrongfully obtains and uses another person’s personal information (such as name, social security number, bank account information, etc.) in a way that involves fraud or deception, usually for economic gain.  It has become the number one consumer complaint to the Federal Trade Commission for 15 consecutive years.

Businesses, government agencies, and other organizations make significant efforts to secure the personal information of customers and employees.  Even though significant effort is put forth to combat identity theft, criminals are becoming increasingly sophisticated.  A data breach can expose personal information to criminals causing harm to their victims.  In response to such breaches, organizations often provide credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services to customers and employees whose information may have been breached.

When Identity Theft Protection Services are Tax-Free

The IRS has received questions regarding the taxability of identity protection services provided at no cost to customers and employees whose personal information may have been compromised.   The IRS issued an announcement that it will NOT assert that an individual whose personal information may have been compromised in a data breach must pay tax on the value of the identity protection services provided by the organization that experienced the data breach.

Additionally, the IRS will not assert that an employer providing identity protection services to an employee whose personal information may have been breached must include the value of identity protection services in the employee’s taxable compensation.

When Identity Theft Protection Services are Taxable

The IRS also states that this tax-free provision does NOT apply to cash received in lieu of identity protection services, or to identity protection services received for reasons other than as a result of a data breach, such as identity protection services received in connection with an employee’s compensation benefit package.  This announcement also does not apply to proceeds received under an identity theft insurance policy.

What if Identity Theft Protection Services are Provided before a Breach Occurs?

The IRS received comments stating that an increasing number of businesses are combating data breaches by providing identity theft protection services to employees and other individuals before a data breach occurs in order to help detect any occurrence of a breach in their information systems, and to minimize the impact of their operations.

Accordingly, the IRS will NOT assert that an individual must pay tax on the value of identity protection services provided by the individual’s employer or by another organization to which the individual provided personal information.  Similarly, employees will not have to include in taxable income the value of such services provided by their employers.

Again, this announcement does not apply cash received in lieu of identity protection services or proceeds received under an identity theft insurance policy.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Current Status of Tax Reform

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The President recently reaffirmed his desire for a 15% business tax rate that applies to all business entities (C corporations, S corporations, LLCs, etc).  However, most analysts do not believe that a 15% tax rate is possible with a $20 trillion national debt.  The House Republican plan called for a 25% tax rate.

Service Businesses May Not Benefit

According to a recent piece in the Wall Street Journal, Secretary Mnuchin stated that the lower 15% tax rate would NOT apply to service businesses such as accounting (boo!!!) or law firms.  The idea is to tax these services businesses at a rate between the lower business tax rate and the tax rate that applies to wages.  That new rate would apply to pass-through service businesses but with boundaries to prevent it from being used by services businesses where the pass-through income more closely resembles wages…sounds perfectly workable!

Principles of Tax Overhaul

The President outlined four principles as guiding his tax reform efforts:

  • A fair and simple tax Code
  • A tax Code that is competitive with other nations’ tax Codes
  • Tax relief for middle-class families
  • Repatriation of overseas profits (i.e., lowering the tax on profits corporations bring back to the U.S. from foreign corporations).

What to Expect Next

Outside of general principles, details are still unknown.  Republicans plan to release details of tax overhaul on September 25.  If a tax cut is passed, it is expected to take effect retroactively to January 1, 2017.

 

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Rules for Deducting Rental Losses

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Rental losses may not be deductible because of the passive activity loss rules. The passive loss rules apply to activities in which taxpayers do not materially participate.  Taxpayers usually satisfy the material participation standard by being involved in a business for 500 hours per year (although there are several other ways of materially participating).  Passive losses can only be deducted against passive income.  Passive losses will also be allowed when the activity is disposed of in a taxable transaction (e.g., the activity is sold).  Congress created the passive loss rules in 1986 to curb tax shelter abuses.  Unfortunately, these rules also affect many legitimate activities.

Unfortunately, rental activities will be classified as passive activities even if the taxpayer materially participates in the rental.  Therefore, rental losses will not be deductible against other income until the rental activity is disposed of in a taxable transaction (e.g., the rental property is sold).

Fortunately, there are three ways rental losses may be deductible:

  • If the taxpayer actively participates in the rental activity, rental losses of up to $25,000 per year may be deductible
  • If the taxpayer meets the requirements to be classified as a real estate professional
  • If the activity is not treated as a rental by the tax law

Actively Participating in the Rental Activity

Taxpayers who actively participate in a rental activity can deduct up to $25,000 of rental losses per year.  Taxpayers actively participate in a rental activity through managerial functions such as deciding on rental terms, approving tenants, and approving capital expenditures.  Taxpayers must own at least 10% of the value of the rental activity to meet the active participation standard.  Finally, the $25,000 loss is reduced by 50% of the excess of the taxpayer’s adjusted gross income over $100,000.

Example:  Wilma owns a rental property.  She negotiates lease terms with potential tenants, approves tenants, and decides what improvements (repairs, carpeting, etc.) will be made to the property before leasing it out. Wilma’s adjusted gross income is $90,000.  Since Wilma decides on rental terms, approves tenants, and approves capital expenditures, she actively participates in the rental.  Her income is below the phaseout threshold so she can deduct up to $25,000 of rental losses.  

Real Estate Professionals

Real estate professionals may fully deduct rental losses.  A Taxpayer must meet the following three requirements to be classified as a real estate professional:

  • She must spend more than 750 hours per year in real property trades or businesses in which she materially participates (e.g., spends more than 500 hours in the activity) AND
  • She spends more than 50% of her time in real property trades or businesses in which she materially participates
  • She must materially participate in the rental activity for which she is trying to claim a loss

The term real property trade or business means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Example:  Barney is a real estate broker.  He spends 1,000 hours per year working as a broker.  He also spends 1,000 hours per year managing an apartment building that he owns.  The apartment building will suffer a $100,000 rental loss this year.  These are Barney’s only activities.  Since Barney spends 2,000 hours per year on real estate businesses and 100% of his time is spent on real estate businesses, he is a real estate professional.  Since Barney spends more than 500 hours in the apartment building activity, he materially participates in the apartment building activity.  Barney meets the requirements of the real estate professional exception and may fully deduct the $100,000 loss.

Activities Not Treated as Rentals by the Taw Law

Rental activities of a very short duration or that require substantial services along with the rental property may be classified as business activities rather than rental activities.  This is due to the increased involvement of the taxpayer in such activities.  If a rental activity is classified as a business activity, taxpayers may be able to deduct losses if they materially participate.  Normally, rental losses are not deductible even if taxpayers materially participate (unless the active participation or real estate professional exceptions apply).

The following rental activities are treated as non-rental activities:

  • The property is rented by each customer for an average of seven days or less (e.g., hotel rooms or cars)
  • Significant personal services are provided, and each customer rents the property for an average of more than seven, but no more than 30 days (e.g., a dude ranch or resort).
  • Extraordinary personal services are provided, regardless of the average period of customer rental (e.g., nursing home).
  • The rental is incidental to the taxpayer’s nonrental activity, (e.g., the rental of a parking lot for a special event). If the gross rental income in those situations is less than 2% of the lesser of the property’s unadjusted basis or its fair market value, the rental of the property is considered incidental to a nonrental activity.
  • The property is made available by the taxpayer during defined business hours for nonexclusive use by various customers (e.g., a golf course that has both daily customers and customers who purchase long-term passes).

If the taxpayer conducts one of these activities, she will be able to deduct losses as long as she materially participates in the activity.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Leave-Based Donation Programs for Victims of Hurricane Harvey

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In response to the extreme need for charitable relief for victims of Hurricane Harvey, some employers are adopting leave-based donation programs.  Under these programs, employees can essentially donate their vacation and sick pay to charitable organizations.

The IRS recently issued a notice that cash payments an employer makes to a charitable organization in exchange for vacation, sick, or personal leave that its employees elect to forgo will NOT constitute income or wages of the employee if the payments are:

  • Made to charitable organizations for the relief of victims of Hurricane Harvey and Tropical Storm Harvey and
  • Paid to the charity before January 1, 2019

The IRS will not allow double dipping—employees won’t have to claim the donated vacation, sick, or personal leave time as income but they will also not be allowed a charitable donation for the amount donated.

The employer will take a business (and not a charitable deduction) for the amount of vacation, sick, or personal leave time donated.

People also need to be aware of scam artists that have created fraudulent charities.  The IRS cautions people wishing to make disaster-related charitable donations to avoid scam artists by following these tips:

  • Be sure to donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. The IRS website at IRS.gov has a search feature, Exempt Organizations Select Check, through which people may find qualified charities; donations to these charities may be tax-deductible.
  • Don’t give out personal financial information — such as Social Security numbers or credit card and bank account numbers and passwords — to anyone who solicits a contribution. Scam artists may use this information to steal a donor’s identity and money.
  • Never give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.
  • Consult IRS Publication 526, Charitable Contributions, available on IRS.gov. This free booklet describes the tax rules that apply to making legitimate tax-deductible donations. Among other things, it also provides complete details on what records to keep.

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Restaurant Owners–What Are Your Numbers Really Telling You?

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Successful restaurant owners are focused on providing high quality food at reasonable prices and with very good service.  This is obviously a very important focus for restaurant owners.  Successful restaurant owners also know that there is a numbers side to the business—how profitable is the restaurant?

It is helpful for restaurant owners to know how their financial numbers look compared to their competition.  When restaurant owners compare their numbers to industry norms, interesting questions tend to arise.  They begin to take closer looks at certain aspects of their restaurants to make sure they are operating the restaurants as profitably as possible.

Our firm has access to real-time databases and we were able to gather information on privately held restaurants in Michigan with sales of $1 million and under.

We found the following information (percentages of sales):

Average Cost of Food    42.57%

Average Gross Profit      57.43%

Payroll                              22.22%

Rent                                  5.92%

Advertising                       4.16%

Example: JoJo’s Restaurant has the following Profit & Loss Statement:

Sales                      $1,000,000

Cost of Food               600,000  (60%)

Payroll                        280,000  (28%)

Rent                           100,000  (10%)

Advertising                   50,000  (5%)

There are some things to note:

JoJo’s cost of food is slightly higher than the average.

This can be caused by:

  • Underpricing the competition
  • Paying higher food costs than the competition
  • Buying higher qualify food than the competition
  • Inventory walking out the back door
  • High inventory waste or spoilage
  • Over-portioning
  • Inventory being eaten by the owners/employees and it’s still being counted as food cost expense

JoJo’s cost of labor is higher than the competition

This can be caused by:

  • Scheduling too many employees during shifts
  • Paying employees a higher wage/salary
  • Employees are moving slowly
  • Having too few employees and paying some employees overtime
  • Employees clock in early and clock out late

Going through the numbers on a regular basis may not be the most interesting thing to do, but it will reveal things about your restaurant that could surprise you.

Learn More About Restaurant Accounting and Tax Services We Provide

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Qualified Small Employer HRA Avoids $100 per Day Penalty

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Background

Over the past few years, there has been a $100 per day per employee penalty for employers who provided certain Health Reimbursement Accounts (HRAs) and/or Employer Payment Plans.

Under an HRA, an employer reimburses employees for the medical expenses up to a certain limit.  The reimbursement is deductible by the employer and tax-free to the employee.

Under an Employer Payment Plan, the employer either reimburses employees for the cost of health insurance premiums or directly pays the insurance company for the employees’ health insurance coverage.  Again, the payment is deductible by the employer and tax-free to the employee.

Under the market reform provisions of Obamacare, these plans became disfavored and subjected the employer to a $100 per day per employee (i.e., $36,500 per employee per year) penalty.  The primary reason for the penalty is because the market reform provisions eliminated any annual or lifetime cap on benefits.  HRAs are generally subject to an annual cap and Employer Payment Plans are deemed to be capped at the cost of the employee’s premium that is being paid.

Qualified HRAs No Longer Subject to $100 per Day per Employee Penalty

Beginning in 2017, qualified HRAs will be exempt from the $100 penalty.  Employer Payment Plans remain subject to the penalty.

For 2017 and later, eligible employers that do not offer group health insurance coverage to any employees can offer a Qualified Small Employer HRA (QSEHRA).  Eligible employers are employers that are not applicable large employers under Obamacare (applicable large employers have 50 or more employees).

The employer must offer a QSEHRA to each eligible employee.  An eligible employee is defined broadly as any employee; however, the employer can elect to exclude the following:

  • Employees who have not completed 90 days of service
  • Employees under age 25
  • Part-time or seasonal employees
  • Employees covered by a collective bargaining agreement covering accident and health benefits
  • Nonresident alien employees with no U.S. source income

A QSEHRA must be provided on the same terms to all eligible employees and funded entirely by the employer.  Payments and reimbursements are limited to $4,950 per year ($10,000 for family coverage) and are prorated if the employee is not covered for the whole year.  For example, if a single person starts employment on July 1, then the limit is reduced by 50%–$2,475 ($4,950 times 50%).  These amounts will be adjusted for inflation.

Payments/Reimbursements are Taxable If Employee Does Not Have Minimum Essential Coverage

Unlike a regular HRA, premiums for individual health insurance policies, as well as other medical expenses such as deductibles and copays, can be paid or reimbursed by a QSEHRA.  However, any payments or reimbursements from a QSEHRA for medical care (including insurance premiums) that are provided when an individual does not have minimum essential coverage are included in the employee’s income.  Generally, an individual health insurance policy qualifies as minimum essential coverage, but the employer must verify that the employee has minimum essential coverage.  Payments under a QSEHRA will affect the employee’s amount and qualification for the premium tax credit.

Employer Must Provide Notice to Employees

An employer funding a QSEHRA must provide written notice to each eligible employee no later than 90 days before the beginning of the year (or the date the employee first becomes eligible to participate).  The notice must state the amount that will be available for reimbursement or payment for the year.  Additionally, the notice must remind the employee that any benefits available under a QSEHRA must be disclosed to the health insurance marketplace if the employee applies for coverage through the marketplace and requests advance payment of the premium tax credit.  The notice must also include a statement that if the employee does not have minimum essential coverage for any month, he may be subject to a penalty for the month and that payments and reimbursements under the QSEHRA may be included in income.

Employers that do not provide proper notice to employees are subject to a penalty of $50 per employee.  The total penalty that can be assessed for one year cannot exceed $2,500.

Finally, amounts paid under a QSEHRA must be reported on the employee’s W2 (even though the payments are generally tax-free).

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

The myRA? It’s Just Been Revoked.

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A myRA is a government-administered Roth IRA authorized to hold only one type of investment, a US Treasury security which earns interest at the same variable rate as investments in the government securities fund for federal employees.  MyRAs became available in 2014 and were described as being safe, simple, and affordable savings accounts to help low- and moderate-income taxpayers save for retirement.

Why the MyRA Program Failed

Unfortunately for the myRA program, there are a multitude of private sector investment alternatives.  Taxpayers have many options in the private market to offer no account maintenance fees, no minimum balance, and safe investment opportunities.  Demand for myRA accounts has been extremely low, and the Treasury Department announced that it will be phasing out the myRA program over the next few months.  Taxpayers have paid nearly $70 million to administer this program since 2014 and the cost to taxpayers is not justified.

MyRAs are Roth IRAs that Can Only Invest in One Security.  When the MyRA Account Becomes Too Big, it Must be Converted to a Roth IRA…Huh?

MyRAs are subject to the same rules that apply to Roth IRAs, including the income-based eligibility for contributions, maximum annual contributions, and tax treatment of distributions.  Participants can save up to $15,000 in a myRA account and can hold funds in myRAs for up to 30 years.  Once either of these limits is reached, the myRA will have to be rolled into a Roth IRA.  So why not just invest in a Roth IRA?  Exactly, that is why the myRA is being discontinued.  Too bad $70 million taxpayer dollars had to be wasted.

The myRA program is no longer accepting new enrollments.  However, existing accounts remain open and accessible, and until further notice, participants can make deposits and their accounts will earn interest.  Participants are being notified of upcoming changes, including information on how to roll over their myRAs into Roth IRAs.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Deducting Travel Expenses for Charity

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People who travel to, or on behalf of, a charitable organization as a volunteer may be able to deduct the travel expenses as charitable contributions.  Unreimbursed travel expenses are deductible only if there is no significant element of personal pleasure, recreation, or vacation in the travel.  In determining whether there is a significant element of personal pleasure, the relevant question is how much time the taxpayer spends in service to the organization and how much time the taxpayer spends in recreation or in free time.

What Travel Expenses are Deductible?

Deductible travel expenses include:

  • Air, rail, and bus transportation
  • Auto expenses.  The use of an automobile for charitable purposes is deductible at the standard mileage rate of 14 cents per mile.  Alternatively, taxpayers may deduct the cost of gas and oil directly related to the use of the auto in providing services to a charitable organization
  • Reasonable food (subject to the 50% meal limitation) and lodging costs necessarily incurred while away from home
  • Transportation costs between the airport or station and the hotel (or place where the taxpayer is staying)

There is no deduction for the value of the volunteer’s time or services.

Example:  Tim is on the board of directors of a charity.  There is a seminar in Florida on fundraising.  Tim is sent by the charity to attend the seminar.  He is covering the travel, lodging, and meal costs.  If the seminar lasts a couple hours a day for three days, and Tim spends most of the day hanging out at Disney World, it is highly likely that the travel contains a significant element of personal pleasure and the travel, lodging, and meal expenses are not deductible.

Example 2:  Same as above except that the seminar is 8 hours a day for three days.  Tim goes out for dinner and entertainment each night.  In this example, most of the day is spent at the seminar and even though Tim enjoys some recreation at night, it is unlikely that this amount of recreation would constitute a significant element of personal pleasure.  Tim would be able to deduct the expenses.

Keeping Records

Unreimbursed volunteer expenses have the same substantiation requirements that apply to cash contributions.  To prove a gift was made, a donor must produce one of the following:

  • A cancelled check
  • A receipt showing the name of the charity, the contribution date, and the contribution amount

A contribution of $250 or more must, in addition to meeting one of the two above requirements, be supported by a contemporaneous written acknowledgement by the charity.  It is critical for clients to have all required receipts before filing their return, even if this means extending the return.  Since the charity is not directly receiving funds it may be unaware that the volunteer incurred the expenses, volunteers have to be proactive in requesting an acknowledgement that they incurred unreimbursed expenses while volunteering.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

What You Need to Know about the Alternative Minimum Tax

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The alternative minimum tax (AMT) can increase the complexity of your tax planning. Knowing the basic rules can help you better plan for its potential impact.

How It Works

Originally introduced in the 1960s, the AMT system was designed to prevent higher income taxpayers from avoiding federal income taxes through the use of various exclusions, deductions, and credits. To achieve this goal, the AMT system treats certain items — referred to as “preferences” and “adjustments” — less favorably than they are treated for regular income-tax purposes.

Affected items include interest on certain tax-exempt bonds; itemized deductions for home equity loan interest, state and local income taxes, and medical expenses; personal and dependency exemptions; incentive stock options; and depreciation.

Generally, the AMT calculation starts with your regular taxable income and requires you to make the required revisions for adjustments and preferences until you arrive at alternative minimum taxable income (AMTI). Then, after an exemption amount is subtracted, a 26% tax rate is applied to the first $187,800 (in 2017) of the resulting income, and a 28% tax rate is applied to any amounts above $187,800.

The 2017 exemption amounts are $84,500 (married filing jointly), $53,900 (single and head of household) and $42,250 (married filing separately). These exemptions phase out at higher income levels.

Planning

If you believe you may have a potential AMT problem — either this year or in 2016 — you may be able to use certain strategies to reduce your tax. For example, if a tax projection indicates that you will be subject to AMT this year but not next year, you may want to delay prepaying certain expenses, such as state and local income taxes, for which you would not receive a tax benefit this year.

Connect with our team today for all the latest and most current tax rules and regulations.

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The Tax Implications of a Company Car

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When an employer provides a company vehicle to an employee, the employee must generally include the market value of her personal use of the vehicle in her income.  The employer can generally take a payroll deduction for the actual costs, including depreciation, of providing the vehicle to the employee.

If the personal use of the vehicle is de minimis (of such small value that accounting for it would be impractical), the employee will not have to include the value of her personal use in income.  However, personal use of more than one day per month is not considered de minimis, so this exception is of little value.

Determining How Much to Include in the Employee’s Income

Under the general valuation rule, the value of the company vehicle that is included in the employee’s income is what it would cost the employee to lease a comparable vehicle for the same period the vehicle is available to her.  Generally, a cents-per-mile value cannot be used unless a comparable vehicle is available for lease to the employee on a cents-per-mile basis.

There are also three special valuation rules (each having different requirements).

  • The Annual Lease Value Method
  • The Commuting Value Method
  • The Cents-per-Mile Method

The Annual Lease Value Method (ALV)

The ALV is based on IRS tables and is based on the market value of the vehicle on the first date it is available to the employee.  The vehicle’s purchase price can be used as the market value if the vehicle was purchased in an arm’s length transaction.  If the employer leases the vehicle, the employer can use the MSRP plus sales tax less 8% of this sum as the market value.

Example: ABC Corp leases a Ford Focus.  The MSRP for the car is $23,000.  After sales tax, the cost is $24,380.  ABC Corp can reduce this sum by 8% to determine a market value of $22,429 to look up in the ALV tables.  Based on the ALV tables, the employee will have to include $6,100 as income for her personal use of the car with a market value of $22,429.

The ALV includes maintenance and insurance, but does not include gas.  If the employer pays for gas, the value of the gas will have to be included in income in addition to the ALV amount.

The Commuting Value Method

This method may be used if four requirements are met:

  • The auto must be owned or leased by the employer and provided to the employee to use in the employer’s business
  • The employer requires, because of business reasons, the employee to commute in the vehicle (e.g., the employee is on 24 hour call)
  • The employer must have a written policy that forbids the employee (or certain family members) from using the vehicle for personal reasons other than commuting or de minimis personal use
  • The employee required to use the vehicle must not be a controlling owner of the employer

If these requirements are met, the personal use value of the company car will be $3 per round trip ($1.50 per one way commute).

The Cents-Per-Mile Method

This method may be limited because it cannot be used when the value of the vehicle when it first becomes available to the employee exceeds $15,900 for a passenger vehicle and $17,800 for a truck or van.  In addition, this rule may be used only for vehicles that are expected to be used in the employer’s business throughout the year, or for vehicles that are actually driven at least 10,000 miles in that year and used primarily for business by employees.  If the vehicle qualifies under this method, the standard mileage rate (53.5 cents in 2017) may be used to determine the personal use value of the vehicle.

Requirements of All Special Use Valuation Methods

To use any of the three special valuation rules, one of the following conditions must exist:

  • The employer treats the value of the vehicle as wages for reporting purposes before the extended due date of its tax return for the year the benefit is provided
  • The employee includes the value of the benefit in income before the extended due date of her tax return for the year the benefit is provided
  • The employee is not in control of the employer
  • The employer demonstrates a good faith effort to treat the benefit correctly

Payroll Tax Implications

The employer must report and withhold income and employment taxes on the value of personal use of a company car.  However, there are two elections available to the employer:

  • The employer can elect to treat the personal use value as paid at any time during the year.  Thus, the employer can treat the entire personal use value as being provided on December 31 of each year to delay the due dates of the income withholding and payroll taxes
  • An employer can elect not to withholding income taxes (the employee will have to pay income tax estimates on her own).  However, the employer is still responsible for employment taxes.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

 

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