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 $15,600 for a passenger vehicle and $17,600 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 (54.5 cents in 2018) 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.