The Latest News on the Personal Use of Company Cars
The free use of a company car is one of the best perks an employee may be entitled to as part of a compensation package. But the benefit to the employee isn't completely "free" under current tax law. Essentially, personal use of a company car is treated as a taxable fringe benefit, subject to income tax withholding obligations by the employer. This process is often complicated by the complexity of the related tax rules. Basics about Company-Provided Cars Start with the premise that an employer providing a taxable fringe benefit to an employee is responsible for withholding federal income tax, FICA tax and FUTA tax based on the fair market value (FMV) of the benefit. This is generally reflected in the employee's paychecks, but the FMV may be reduced by:- Any amount excluded from compensation by law; and
- Any amount the recipient pays for the fringe benefit.
- The Commuting Rule may be used 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 must be included in the employee's taxable compensation or the employer can be reimbursed for this amount 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. However, it is available only if these requirements are 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 does not allow the employee to use the vehicle for personal purposes, other than for commuting or "de minimus" personal use (for example, a trip to the dry cleaner's between a business stop and arriving at home).
- The employee in actuality does not use the vehicle for other personal purposes.
- The employee is not a "control employee" (see right-hand box).
- The Cents-per-Mile Rule is based on the IRS standard mileage rate. For 2015, the rate is 57.5 cents per business mile (up from 56 cents per mile in 2014). Employees must either reimburse the employer at this rate for all personal miles driven in an employer-provided vehicle or the employer can add the value to the employee's taxable compensation. If the employer doesn't provide gasoline for the car, the rate may be reduced by 5.5 cents per mile.
- 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. For 2015, the value cannot exceed $16,000 for a vehicle (unchanged from 2014) or $17,500 for a truck or van (up from $17,300 for 2014).
- The vehicle must be used for business reasons for at least 50 percent of the annual mileage.
- The vehicle must actually be driven at least 10,000 miles during the year (or proportionately if the vehicle is used less than a full year).
- The vehicle must be used during the year primarily by employees.
- The method must be used in subsequent years (absent any special circumstances).
- The Annual Lease Value 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 FMV of the business use of the vehicle to establish the difference as the amount of the taxable fringe benefit. For 2015, the annual lease value method cannot be used for a vehicle with a FMV above $21,300 (unchanged from 2014) or $22,900 for a truck or van (up from $22,600 for 2014).
Who Is a Control Employee?
For 2015, a control employee under the fringe benefit rules generally includes:
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