In many industries it is not uncommon for employees to have to travel to visit clients or drive miles away from the office in order to be on a job site. The need motivates companies to purchase lease work trucks and allow employees to drive those company vehicles for both business and personal use. Other companies will ask employees to use their own vehicles instead. Business owners and employees should be aware of the effects of personal vehicle miles from a tax perspective.
The IRS allows a deduction for mileage when a personal vehicle is used for business purposes. Some companies will pay employees based on the number of business miles they drive. Others will institute an accountable plan where they front the employees a flat amount of money and ask the employee to substantiate their vehicle expenses and repay any difference.
Qualified vehicle business use is defined as more than 50% in a trade or business by an unrelated person. He or she must also be own no more than 5% ownership in the company.
Years ago vehicle miles were tracked by pen and paper but now there are online options that allow both business and personal mileage to be tracked. The most popular of these is MileIQ, a mobile app that logs your mileage and provides easy access to printed reports.
Commuting to Work Using Company Vehicle
Typically, when an employee uses his or her own vehicle to drive from home to the office there is no financial transaction or obligation to the employer. However, things change when the employer allows a company vehicle to be used personally. If an employer gives an employee a vehicle for personal use, it becomes a fringe benefit and a taxable event occurs. The benefit that must be calculated and included in the employee’s income.
Jake works for a growing e-commerce business. The stress of his commute leaves him hot under the collar and stressed out. His employer owns a new vehicle that has a fair market value of $30,000 and annual lease value of $8,250. On January 1 his employer decides to allow Jake to use the vehicle personally. $8,250 becomes taxable to Jake.
Jake works for a busy e-commerce business. Jake gets a car from the business for personal use. The online business is owned by Jake’s brother Eric. This would not be considered qualified business use because Jake and Eric are related and the personal vehicle use would not be taxable to Jake.
Benefits of Using Company Vehicle
- Increased Productivity
- Brand Promotion
There are definitely benefits, from an employer’s perspective, for having employees use a company vehicle for personal use. For starters productivity should be better because it’s likely the company vehicle is newer and more reliable than the employee’s vehicle.
In certain situations, such as for commuting, the personal use of the vehicle could still be treated as qualified business for the employer. A vehicle that is used for more than 50% is still eligible for accelerated depreciation.
No matter how large or small a business is it still has a brand. Having a company car gives the employer the opportunity to promote the brand and control its image. The public takes a business more seriously when it sees a clean vehicle with the company’s logo.
There is a special valuation that employers can use if they allow a company vehicle to be used by its employees. If the employee is not a highly-compensated individual and does not have an ownership stake in the business then a $3 round-trip commuting cost can be allocated. However, a written policy must be in place that strictly limits the vehicle’s use to commuting miles.
The IRS allows a standard mileage rate each year. Employees can track the personal use of the vehicle and then determine the amount that will be included in their income by multiplying those personal miles by the standard mileage rate. The FMV of the vehicle cannot be more than $50,400 and it must be driven at least 10,000 miles a year.