It often occurs in business that employees are allowed to use the employer’s vehicles in order to fulfill their job responsibilities. However, what happens if 100% of the vehicle use is NOT for business purposes? Is the employee required pay income tax on the personal use value portion of the vehicle? This is a question that is asked often and requires some very special valuation considerations as discussed below.
An employee can exclude from their income the component of the use of the employer provided vehicle that is used in the performance of the employer’s business. This is known as a “working condition fringe benefit”. The balance of the vehicle use that is not business related but considered personal auto use would be considered a taxable fringe benefit to the extent it is not reimbursed to the employer by the employee.
The employee must include in income the FMV of the fringe benefit reduced by 1) the amount paid for the benefit or 2) the amount specifically excluded from gross income by statute (i.e. the working condition fringe benefit).
There are 3 special valuation rules that can be used to determine the FMV of the fringe benefit that the employee must include in their income. The employer is responsible for selecting the valuation method to be used. The taxable fringe benefit will be subject to FICA taxes as well as income taxes and must be included on the employees W-2. The three valuation methods are:
- Automobile Lease Valuation Method – this method requires the FMV at time auto was purchased to be used for the first 4 years the employee uses the vehicle. (Find IRS Annual Lease Valuation Tables). The FMV is redetermined at January 1of the fifth tax year based on the FMV at that time. FMV is redetermined if the vehicle is transferred to another employee. Fuel provided by the employer is valued at $0.055 cents per mile in addition to the value auto itself. Once adopted, the use of the ALV method must continue for that auto, except the commuting valuation rule may be used for any period the auto qualifies.
- Vehicle Cents Per Mile Valuation Method – requires that the standard mileage rate times the number of the personal miles used be used to determine the taxable fringe benefit. However, this method can’t be used if the value of the auto exceeds $12,800 adjusted for inflation ($16,000 for autos and $17,500 for trucks and vans first purchased in 2015). The auto must either be regularly used in the employer’s business or driven for at least 10,000 miles per year primarily by employees. The standard rate includes maintenance, insurance and fuel provided by the employer. The rate can be reduced by $0.055 cents per mile if the employer does not provide the fuel. Once this method is adopted then it must continue to be used unless the commuting valuation rule can be used.
- Commuting Valuation Rule – This method values each round trip to $3 per day per employee. The commute in the vehicle must be required for bona fide compensatory reasons. The employer must maintain and enforce a written policy against other personal use. The auto must be provided for employee use in business. The term employee does not include any director, 1% or more shareholder, certain officers or employees whose compensation exceed $100,000 ($215,000 indexed for inflation for 2015)
As you may be able to tell from above the Automobile Lease Valuation Method is the most often used method.
Please contact our office to speak with one of our accountants if you require further assistance on this important tax issue.