Personal Use of Company Owned Automobiles

JOEL GERMERSHAUSEN

CPA & Tax Manager

Eide Bailly

jgermershausen@eidebailly.com

www.eidebailly.com

Topic: Accounting

The portion of an employer-provided vehicle used by an employee in the employer's business is referred to as a "working condition fringe benefit" and is excluded from the employee's income. The use of the vehicle for personal purposes is a taxable fringe benefit to the employee and considered income, reportable on the employee's W-2.

There are several ways to value an employee's personal use of a company vehicle. Under the general rule, the employer must determine the actual fair market value of the employee's personal use of the company vehicle.

For greater transparency and because this can be an arbitrary number, the IRS allows three alternative valuation methods:

• Annual lease value method

• Cents-per-mile method

• Commuting value method The annual lease value method and cents-per-mile method are the most commonly used, as they are the easiest to calculate and account for. Regardless of valuation method used, the employee should keep a record of miles driven for company business and miles driven for personal use.

These records should then be retained by the employer in the event of questions. Once the valuation method has been elected by the employer, it must be used for all subsequent years for the same vehicle being used by the same employee.

Under the annual lease value method, a company determines the fair market value (according to rules provided in the Internal Revenue Code) of the vehicle as of the first date on which the vehicle is made available to the employee. That value is then referenced against tables provided by the IRS to determine an annual lease value. Taxable income to be reported by the employee is determined by the annual lease value multiplied by the ratio of the employee's annual personal mileage to the total annual mileage.

In addition, if the employer also provides fuel, whether in kind, by means of a reimbursement arrangement, or by directly charging the cost of fuel to the employer, 5.5 cents per personal mile will be added to the employee's taxable income. This valuation is made for a four-year period and the fair market value of the vehicle is re-determined at the beginning of the fifth year.

Under the cents-per-mile valuation method, the standard mileage rate is multiplied by the annual personal mileage to determine the value of the benefit to include in the employee's income. The standard mileage rate is updated, usually annually, and published by the IRS each year. The mileage rate for 2009 is currently 55 cents per mile.

One important caveat to this method is that it cannot be used if the value of the vehicle exceeds $15,000 for passenger vehicles or $15,200 for trucks and vans which were first made available to an employee in calendar year 2009.

The third method, the commuting valuation method, is rarely used and will not be discussed at length. In general, this method provides for a reimbursement of $1.50 per one way commute if certain conditions are met.

From a reporting standpoint, personal use of a company owned vehicle must be reported as income on the employee's W-2. For tax reporting, this income is subject not only to income tax but to social security and Medicare tax as well.

2010-07-18 23:00:00 -0600