Industry Insights

Determining the Personal-Use Benefit of Company-Owned Vehicles

November 2017
Author:  Julia Dengel

Julia Dengel

Senior Associate II

Tax

1201 Walnut Street, Suite 1700
Kansas City, MO 64106-2246

Kansas City
816.221.6300

Due to the convenience for both employer and employee, many businesses offer company-owned vehicles for employee use. This use can be categorized as either business or personal. For purposes of this designation, commuting between an employee’s home and the workplace falls into the personal-use bucket. While business usage is considered a nontaxable working condition fringe benefit, any personal use an employee incurs is taxable and must be reported on the employee’s Form W-2. This additional income is subject to mandatory payroll tax and—at the employee’s discretion—optional federal tax withholding. To determine the includable amount, employee use of business vehicles should be properly substantiated and valued.

Substantiation

Properly substantiating business use is accomplished by maintaining mileage logs with the following information regarding each trip:

  • Date
  • Destination
  • Miles driven
  • Business purposes of each trip

Mileage totals should be periodically reconciled to the vehicle’s odometer with any undocumented miles attributed to personal use.

Valuation

After identifying and substantiating the portion of an employee’s automobile use related to personal or commuting activities, the next step is to assign the proper taxable value to that use. This calculation can be made based on a variety of methods depending on the type of use.

Commuting Rule

A standard rate of $1.50 per day is allowed for calculating the value of solely commuting-based personal use. Certain officers, highly compensated employees or employees who own a 1 percent or more interest in the equity, capital or profits of the business aren’t allowed to use this method. For all other personal use, the annual lease or standard rate-per-mile rules must be used.

Lease Value Rule

Under the lease value rule, the includable value is determined using an annual lease value table, which the IRS publishes annually. Once this method for determining includable value is selected, it cannot be changed in later years; however, the commuting rule can be used in any year in which the employee/automobile qualifies, i.e., a year with no personal use other than commuting. Alternatively, an employer can opt to include the entire lease value of an automobile in an employee’s income. If this approach is used, it’s the employee’s responsibility to claim any potentially deductible business-related automobile expenses as itemized deductions on his or her personal income tax return.

Standard Rate-per-Mile Rule

The standard rate-per-mile rule calculates the includable value of an employer-provided vehicle by multiplying a standard mileage rate by the total personal miles an employee drives in a particular year. The IRS determines this standard rate annually, and it varies by year. To use this method, the automobile’s maximum value must be under a predetermined amount set by the IRS—currently $15,900 for passenger automobiles and $17,700 for trucks and vans. Similar to the lease value rule, once the standard rate-per-mile rule is selected in one year, it must be used in all subsequent years in which the automobile qualifies, unless the commuting rule becomes an allowable option.

Keep in mind the value of any de minimis transportation benefits provided aren’t taxable to an employee. These benefits include items with such little comparative value that accounting for them would be unreasonably burdensome to the company. A bus ticket given to an employee who occasionally works late would fall under this de minimis rule.

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