Business owners need to be cognizant of their business in owning or using a vehicle. There may be personal use of that vehicle and it can be included as taxable income on the employees’ W-2.
How do we qualify the vehicle as a business expense?
First, it will qualify as a business-used vehicle if it is an ordinary or necessary expense. Ordinary means that the expense is common in your work or line of business. Necessary means that the expense is helpful in your business operations but may not be fundamentally essential.
In what common situations are the vehicles used for business?
- Employees working in the job site, offices, or business location. If the employee is commuting from his home to his job site, it is considered a personal expense. The cost of commuting from the employee’s home to his or her regular place of work, such as an office, and vice versa is considered a personal expense.
- Employees who work from home. The employee can use all mileage in going to business sites (may it be permanent or temporary sites) and the employer’s location as business miles.
- Employees with no permanent place of business or no office. For those with no place of business and whose home does not qualify as their place of business under IRS guidelines, miles are considered a personal expense.
- Employees who take the business vehicle home for safekeeping. There needs to be a written agreement that the vehicle prohibits any personal use other than commuting from home to the workplace or job site and vice versa.
Computing the Value of Personal Use of a Company Vehicle
There are different ways to determine the value of the vehicle’s personal use considering it an employee’s fringe benefit.
- Commuting valuation – Determine the value of a vehicle by multiplying each one-way commute by $1.50, based on the Employer’s Tax Guide to Fringe Benefits.
- General valuation. This is the price that the employee would pay to lease the vehicle for the same length of time in the same location.
- Cents-Per-Mile Rule. The cents-per-mile method is used if the employer expects the vehicle to be regularly used by employees in their trade or line of business in a year. In using the cents-per-mile rule, it must be considered as a personal use on the first day it has been used. If the requirements for the cents-per-mile method are met, then the employee’s taxable amount for the personal use of an employer-provided vehicle could be calculated by multiplying the standard mileage rate according to the IRS standard mileage rate.
- Average Lease Value Rule. This is considered if the employer provides a vehicle to an employee for a whole year, then the value of the benefit can be included in the employee’s income as the Annual Lease Value (ALV). This benefit is calculated by first determining the Fair Market Value of the vehicle as of the first day that the vehicle is made available to the employee. The FMV can be determined through reliable automobile pricing sources. As soon as the FMV is determined, the employer can now use the ALV table based on the FMV.
What are the options for employers to be able to plan ahead?
- Have a form where the employee acknowledges that they are not permitted to use that vehicle for personal use. It can be in the form of a Company Vehicle Usage Policy which may include the following examples:
- Employees may not drive any business vehicles without prior approval of the employer or his authorized representative;
- Employees who need transportation in to be able to do their normal work may be assigned a company vehicle for their use;
- Employees who drive a vehicle on company business must meet the driving requirements and exercise due diligence to drive safely and maintain the security of the vehicle and its passengers or contents;
- Employee acknowledges that they can only use it for commuting purposes;
- Non-employees and non-official passengers like family and friends are prohibited from using company vehicles;
- Or other clauses or rules which define the usage of the business vehicle.
- If the employee is allowed to use the vehicle for a substantial amount of personal use, keep all records as the value needs to be calculated into the employee’s W-2.
It is highly important that both employees and employers keep adequate records of their business and personal use. Those businesses or employers who provide vehicles to their employers must maintain mileage logs and other documentation if they wish to include the value of their personal use in their employee’s W-2s. These records can also be useful in taking deductions related to business use and personal returns.
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