By Pam Swartout, Manager and Jacoby Shade, Staff Accountant at Blue & Co.
Many business owners provide a company vehicle to their employees as part of their employment.
This is a company benefit that has tax implications and is extremely important for both the employer and employee to understand these implications.
Employers can deduct only the expenses associated with business use of the company vehicle. The personal use of the company vehicle is considered part of the employee’s fully taxable wage income.
Therefore, it is very important to determine the business and personal use when providing a company vehicle.
What Exactly is Personal Use of Auto?
To start, the definition of personal use of auto is any use of a company owned vehicle outside of business use directly for the company.
Commuting to and from work, vacation, or weekend use, and use by spouse or dependents is not considered business use and creates a taxable fringe benefit to the employee based on the ratio of personal and commuting miles driven to total miles.
The fringe benefit can be paid on a regular pay period, quarterly, semi-annually, or annually.
The employer does not need to notify the IRS of the reporting period and may change the period throughout the year, so long as they are treated as paid by December 31.
An employer may elect to utilize annual reporting periods ending on October 31. November and December (or any shorter period) can be carried forward and treated as benefits for the following year.
By utilizing a reporting period other than December 31, you will avoid the year-end rush to accumulate data needed to calculate amounts to be included as compensation on the employee’s W-2 form.
The employee must keep “adequate records.” If the employee does not provide mileage documentation, all use of the vehicle is considered wages to the employee.
To satisfy the “adequate record” requirement, taxpayers must maintain a contemporaneous account book, diary, log, statement of expense, trip sheets or similar records, and documentary evidence that in combination, are sufficient to establish business use.
The IRS has presented four different ways to compute the value of personal use to be reimbursed as compensation.
A single method must be selected, and the employer must notify the employees of the valuation method by January 31.
Different Methods Available for Computing the Value of Personal Use
General Fair Market Value Method — value of employee’s use of an automobile equals the amount the employee would have to pay to lease a comparable vehicle on comparable terms in the geographic area in which the vehicle is available for use.
Annual Lease Value Method — value of employee’s use is based on the IRS supplied table that provides the value of leasing the automobile based on its fair market value. Fuel, repairs, and maintenance costs need to be added to the lease value determined.
Cents-Per-Mile Method — value of employee’s personal use is based on the number of personal miles driven multiplied by an IRS-supplied optional standard mileage rate. For 2022, the rate was 58.5 cents per mile for travel from January 1 through June 30 and increased to 62.5 cents per mile for the remainder of the year if the company also provides fuel. For 2023, the rate has increased to 65.5 cents per mile
Commuting Rule – $1.50/one-way commuting trip if the vehicle is only allowed for business purposes and very minimal personal usage.
The taxable amount of fringe benefit must be included as compensation on the employee’s W-2.
The employer may elect not to withhold federal income tax; however Social Security (up to the limit) and Medicare taxes must be withheld.
If the employer elects not to withhold federal income taxes on the value of providing a vehicle, written notification must be provided to the employee by January 31 of the election year or within 30 days after a vehicle is first provided to the employee.
For 2022 W-2 presentation, the taxable fringe benefit is included in box one (Wages, Tips, Other Compensation) and box three (Social Security Wages).
If the employee is above the taxable limit of $147,000, box five (Medicare Wages), and box 14 (Other), should contain a notation that the amount is for personal use of auto.
This fringe is also taxable in Indiana, Kentucky, and Ohio, and should be included in box 16 (State wages, tips, etc.) and box 18 (Local wages, tips, etc.).
The 2023 IRS Employer’s Tax Guide to Fringe Benefits, including fringe benefit valuation rules, and methods for computing the value of personal use of auto can be found here.
To conclude, it is vastly important that the employee track and maintain personal versus business use of a company vehicle.
Even though Federal taxes are not required to be withheld, the employer must withhold Social Security and Medicare wages from the amount of fringe benefit.
If you need any assistance with what qualifies as personal use of auto, how to compute the value of personal use, or would like more information, please reach out to your local Blue & Co. advisor today.