The perk of a company car isn’t entirely “free” for employees.
Generally, employees are taxed on the personal value of this fringe benefit, subject to certain special rules and annual limits. Significantly, the IRS recently announced the 2017 thresholds applicable for valuations of vehicles.
An employer that provides taxable fringe benefits to employees is responsible for withholding taxes from employees based on the fair market value (FMV) of the benefits. The FMV may be reduced by amounts excluded from taxable compensation by statute and payments by employees for the fringe benefit.
Because personal use of an employer-provided vehicle is a non-cash fringe benefit, the FMV must be determined at least once a year for withholding purposes. However, an employer may choose to determine FMV on a monthly or quarterly basis.
To simplify tax reporting involving monthly valuations, the employer may use a special accounting rule that includes the value of a fringe benefit for the last two months of the calendar year with the value for the first ten months of the following year.
If an employer uses this safe-harbor rule for one type of fringe benefit for one employee, it must use it for all employees. Furthermore, employees must be notified of the use of the special rule. Typically, the monthly valuation of personal use of a vehicle will depend on employee travel logs.
Sometimes, an employer may provide company-owned vehicles to employees without requiring documentation of personal use. As a result, the entire FMV of the vehicle is included in the employee’s taxable income. In this case, the employee has the option of deducting costs attributable to business use of the vehicle on his or her Form 1040, subject to other limitations.
Three Valuation Methods
The IRS has established three primary methods determining the FMV of the vehicle:
Commuting rule. If the sole personal use of an employer-provided vehicle is commuting back and forth from work, the value of each one-way commute is $1.50. This amount, which hasn’t changed in years, is either included in the employee’s taxable compensation or the employer can be reimbursed for it by the employee.
The commuting rule method is the easiest one to administer because it doesn’t require employees to keep mileage logs of vehicle use, but it’s not always available (see “Easy Does It, if You Can Use this Method” below).
Cents-per-mile rule. This method is based on the annual IRS standard mileage rate. For 2017, the rate is 53.5 cents per business mile (down from 54 cents per mile in 2016). Employees must either reimburse the employer at this rate for all personal miles driven in an employer-provided vehicle or add the value to the employee’s taxable income. If the employer doesn’t provide gasoline for the car, the rate may be reduced by 5.5 cents per mile.This rule has certain restrictions:
- The value of the vehicle at the time it is made available to employees cannot exceed the maximum value established by the IRS each year.
- The vehicle must be used for business reasons for at least 50% of the annual mileage.
- The vehicle must actually be driven at least 10,000 miles during the year (or proportionately fewer miles if the vehicle is used less than a full year).
- The vehicle must be used primarily by employees.
- The method generally must be used in subsequent years (absent any special circumstances).
Note: The cents-per-mile rate includes the value of maintenance and insurance. If the employee pays for these expenses, the value of the personal use is reduced based on receipts provided by the employee.
Annual lease value rule. This rule requires the employer to determine how much of the vehicle’s FMV can be excluded from the employee’s income as a working condition fringe benefit. In other words, the employer must calculate the FMV of the vehicle and the lease value of the business use of the vehicle to establish the difference as the amount of the taxable fringe benefit.
The FMV is based on IRS tables and must be determined on the first date a vehicle is available for use by an employee. Once the annual lease value is set, the employer must determine the percentage of the vehicle’s use that is personal, based on mileage logs.
Note: The annual lease value doesn’t include the cost of gasoline. An employer can either determine the value of personal use based on the fair market value of gasoline (if it provides it at a rate of 5.5 cents per mile). If an employee doesn’t keep mileage records, the entire lease value, plus gasoline costs, is taxable to the employee.
New Valuation Thresholds
The IRS recently announced the maximum FMVs for employer-provided cars, trucks and vans using the mileage allowance of 53.5 cents per mile and the maximum fleet-average vehicle FMVs for autos, trucks and vans for purposes of the annual lease value method.
- Cents-per-mile method. This method may be used only if the auto’s FMV doesn’t exceed $12,800, adjusted for inflation. The thresholds for vehicles first made available to employees for personal use in 2017 are $15,900 for automobiles (unchanged from 2016) and $17,800 for trucks and vans (up from $17,700 for 2016).
- Fleet average method. This rule can’t be used to determine the average lease value of any vehicle if its FMV on the date it is first made available in 2017 for employee personal use exceeds $21,100 for a passenger auto (down from $21,200 for 2016) or $23,300 for a truck or van (up from $23,100 for 2016).
If all other requirements are met, an employer with a fleet of 20 or more vehicles consisting of passenger autos, trucks and vans may use the fleet-average valuation rule as long as the respective maximum allowable values aren’t exceeded.
A company car is still used as a fringe benefit for attracting and retaining key employees. But it’s important to address all the payroll tax complexities relating to the personal use of a vehicle. Consult with your tax advisor to help ensure you meet the requirements.
Easy Does It, If You Can Use this Method:
To use the simplified commuting method, the easiest of all, the following requirements must be met:
- The employer provides the vehicle to the employee for use in the employer’s trade or business.
- The employer has a written policy that doesn’t allow the employee to use the vehicle for personal purposes, other than for commuting or “de minimis” personal use, such as a trip to the dry cleaner between a business stop and home.
- The employee in actuality doesn’t use the vehicle for personal purposes.
- The employee isn’t a “control employee.”
For 2017, the definition of a “control employee” generally includes:
- A board or shareholder-appointed, confirmed or elected officer whose pay is $105,000 or more,
- A director,
- An employee whose pay is $215,000 or more, and
- An employee who owns a 1% or more in the business. (The dollar figures are unchanged from 2016.)