The Internal Revenue Code taxes individuals and businesses on “all income from whatever source derived.” This includes fringe benefits provided by an employer. Certain benefits provided by an employer are excluded from income by law. The personal use of an employer-provided vehicle is not a fringe benefit that is excluded.
When an employee has the benefit of using an employer-provided vehicle for their personal use, the IRS requires that the value of that benefit be included in the employee’s compensation even though the benefit is a non-cash benefit.
Why Is This Important?
The law requires that each employer provides its employee’s with a W-2 Wage and Tax Statement by February 2, 2015. Required to be reported in each employee’s W-2 taxable wages is the value of any non-cash fringe benefits. This includes the value of each employee’s personal use of a company owned vehicle.
What is Taxable and What Isn’t?
Not every “vehicle” used by an employee will result in a taxable fringe benefit. If a farmer wants to jump on a combine and drive it to the grocery store, the IRS would allow him to do so without taxing him on his personal use. That is because the IRS has defined certain vehicles as “qualified nonpersonal use vehicles. These are vehicles that wouldn’t be used for personal purposes except minimally. Qualified nonpersonal use vehicles listed in IRS Publication 15-B Employer’s Tax Guide to Fringe Benefits include:
- Clearly marked, through painted insignia or words, police, fire, and public safety vehicles
- Unmarked vehicles used by law enforcement officers if the use is officially authorized.
- An ambulance or hearse used for its specific purpose.
- Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
- Delivery trucks and seating for the driver only, or the driver plus a folding jumpseat.
- A passenger bus with a capacity of at least 20 passengers used for its specific purpose.
- School buses.
- Tractors and other special-purpose farm vehicles.
- Bucket trucks, cement mixers, combines, cranes and derricks, dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks.
A pickup truck with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal vehicle if is clearly marked with permanently affixed decals or painted and identifies the truck as a company vehicle and has been specially modified so it is not likely to be used more than minimally for personal purposes. These modifications would include heavy equipment such as a hydraulic lift gate, permanent tanks or drums, an electric generator, a welder, etc.
A pickup truck will also be considered as a qualified nonpersonal vehicle if is used to transport a particular load in a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly modified.
Demonstrator cars used by salespeople employed by a car dealership can qualify as a nontaxable working condition benefit if the use is primarily to facilitate the sale or lease of cars, but there are substantial restrictions on personal use.
When an employer provided vehicle does not meet the definition of a qualified nonpersonal use vehicle, the personal use of the vehicle is a taxable benefit to the employee. The general rule for valuing a fringe benefit is what the employee would have to pay a third-party in an arms-length transaction to buy or lease the benefit, in this case the use of the vehicle. Since calculating the fair market value of the vehicle used personally by an employee isn’t as simple as it sounds, the IRS has provided four other ways to determine the value of the benefit. These four methods are known as:
- Lease Value Rule
- Cents-Per-Mile Rule
- Commuting Rule
- Unsafe Conditions Commuting Rule
Almost all of Potts & Company’s clients use the Lease Value Rule. I expect that is the valuation rule you will use too. Therefore, I am not going to elaborate on the other valuation methods listed. If you have any questions about the other methods, call Joe, Rob, or me or consult the IRS’s Publication 15-B Employer’s Tax Guide to Fringe Benefits.
Lease Value Rule
The lease value rule is basically the default rule. If you do not qualify for the Cents-Per-Mile Rule or the Commuting Rule you’re left with the Lease Value Rule.
To determine the taxable benefit amount of the personal usage of a company vehicle using the lease value rule, you first determine the fair market value of the vehicle on the first date it was made available to the employee. The IRS publishes its annual lease value table each year in Publication 15 B Employer’s Tax Guide to Fringe Benefits. Using the fair market value of the vehicle provided to the employee, you locate the annual lease value calculated by the IRS. This annual lease value multiplied by the percentage of personal miles to the total miles driven by the employee is the amount that is added to the employee’s W2.
As an employer, you will find that many of your employees do a poor job at tracking their mileage. If you’re like the average business owner, you have difficulty tracking your mileage accurately. (Interestingly enough, I have yet to meet an IRS agent that had difficulty in disallowing a mileage deduction for lack of adequate documentation.) Unfortunately if a company owns vehicles which an owner or an employee drive for their personal benefit, keeping up with the mileage is a requirement.
The IRS says that it is the employee’s duty to account for business mileage by substantiating the usage, the time and place of travel, and the business purpose of travel. Any mileage that is not substantiated as business mileage is therefore included in their income. So if you’re having trouble having an employee substantiate your mileage, reminding that the personal portion is included in the W-2 wages might incentivize them to keep adequate records. Of course what is good for the goose is good for the gander, if you catch my drift.
If you are going to comply with the rules and report an employee’s personal usage of a company vehicle on their W-2, you need to be aware of the rules and the methods the IRS allows to value this benefit. Potts & Company recommends that the business owner or responsible person provide a form to each employee to report their personal and business use of company vehicle(s) they drove in 2014. This information can then be used to calculate the taxable value of their personal vehicle business use and added to their 2014 W-2.
If you need a form or an example of a form to accumulate this information from your employees, please contact Leacretia, Terra, or Debbie by calling 479-648-2846 or by emailing them using their name with @potts-cpa.com (e.g. Leacretia@potts-cpa.com).