Accounting for the Personal Use of Business Automobiles
Author: Shawn Loader
The use of a company-owned vehicle for business, commuting or other purposes is a common employee benefit. Using the vehicle for business is considered a working condition fringe benefit that’s not taxable to the employee when substantiation requirements are met. However, an employee’s personal and commuting use doesn’t qualify for this treatment—it requires further employer consideration to compute additional income reported on an employee’s Form W-2 for the tax year.
The requirement to compute a fair market value income inclusion for the personal use of a business auto is driven by a need to substantiate deductions taken for business vehicles that include nonbusiness use in their daily operation. Failure to substantiate business versus nonbusiness use can result in the expenses of owning and operating the vehicle being considered nondeductible for an employer. These deductions can be disallowed upon examination.
Business use is substantiated through maintaining and enforcing a use policy that prohibits or limits the automobile’s personal use to a de minimis and/or commuting-only threshold and outlines the steps an employee must take to help determine business versus personal use amounts. These steps consist of maintaining mileage logs showing the date, destination, miles driven and business purposes of each use of the vehicle. The company needs to retain mileage logs for six years from the employee’s initial use of the vehicle. Mileage totals from the logs should be reconciled with the period-ending odometer reading, with any unexplained miles attributed to personal use and included in the employee’s income on Form W-2. The amounts reportable to an employee’s Form W-2 for personal use of the auto are based on a fair market value assignment to the personal use enjoyed and are subject to mandatory payroll and optional federal tax withholding at the employee’s discretion.
The inclusion of additional income to an employee doesn’t generate another deduction for the employer, and the expenses of ownership deduction stay with the actual vehicle owner. The income inclusion exceptions don’t apply to control employees, including certain officers, highly compensated employees and any director or employee who owns a 1 percent or more equity, capital or profit interest in the business.
The amounts included in an employee’s wage are calculated using a variety of methods, including applying an annual lease/fuel cost determination to the personal use portion, a standard rate per mile for personal use miles or a standard rate per day for a commute-only use. The applicability of these methods will vary based on the company and employee’s facts and circumstances. An application of a method or rate for determining includable income isn’t reversible, and an incorrect rule application could cause the loss of otherwise eligible deductions.
For more information on these valuation rules and the related calculation methods and requirements, please read our BKD article.