Additional Income for Personal Use of Business Vehicles

If an employee is provided a company-owned vehicle, he must receive a taxable fringe benefit for the value he receives from the vehicle use. The actual valuation of the fringe benefit which the vehicle provides can be calculated several ways:

1.      General Valuation Rule – The General Valuation Rule says that the benefit is equal to its fair market value. For a vehicle, that means the value is equal to what the employee would have to pay for that vehicle over the same time period and under similar circumstances to a third party. Typically, a one year lease for the same vehicle in the area will suffice.

 

2.      Cents-Per-Mile Rule – The Cents-Per-Mile Rule takes the total miles the employee drives the vehicle for personal purposes by the standard mileage rate for the year. The standard mileage rate for 2020 is 57.5 cents per mile. This method is only available for vehicles that were valued at $50,400 or less. The vehicle must also be used regularly for the trade or business throughout the calendar year or pass the mileage test. Regular business use means that at least 50% of the vehicle’s total annual mileage is for your trade or business. The mileage test is met if the vehicle is driven at least 10,000 miles during the year and used primarily by employees.

 

3.      Commuting Rule – The Commuting Rule calculates value by multiplying each one-way commute by $1.50. This option is available if you provide the vehicle to an employee for use in your trade or business and require them to commute in this vehicle for a bona fide business purpose, establish a written policy in which employees are not allowed to use the vehicle for personal travel other than commuting and de minimis personal use, and the employee follows the aforementioned written policy. This method is not available for certain owners and highly-compensated individuals.

 

4.      Lease Value Rule – Under the Lease Value Rule, it is necessary for the employee to track his business and personal mileage each time he drives. These records can be kept on paper or electronically, but they must include a description of the purpose for any business travel. You must also determine the fair market value of the automobile on the first day it is available to any employee for personal use. The annual lease value for that vehicle can be found here on page 27. You will need to take that annual lease value times the percentage of personal miles out of total miles driven by the employee to find the value of the benefit.

 

5.      Unsafe Conditions Commuting Rule – The Unsafe Conditions Commuting Rule is also calculated using $1.50 for each one-way commute that the employee drives in the business vehicle. Unlike the regular Commuting Rule, this rule requires that the employee would ordinarily walk or use public transportation for commuting in an area with unsafe conditions, such as a history of crime in the commuting area.

For any of the valuation methods, the value of the fringe benefit must be included in the employee’s wages as a taxable fringe benefit. You may then take the expense as a deduction for the business through payroll.

If you are using the lease value or cents-per-mile rules, the employee should turn in a Mileage Report (PDF version, Excel version) each year. The personal use of a company vehicle will need to be run through payroll as taxable income to the employee. Have the employee enter his mileage information into the above report from November of the prior year to November of the current year. This will give you time to process the fringe benefit before the end of the tax year.

If you have questions about reimbursing employees, using an Accountable Plan, or keeping substantiation for expenses, please contact our office.