If your company provides vehicles for employee use, make sure you are properly accounting for any personal use of the car employees may perform while in possession of the vehicle, as this use may count toward taxable employee compensation and benefits on your tax returns.

When a company-owned vehicle is used for business purposes, it is not considered taxable income because it is required for the employee to do their job. However, when an employee uses a company car for personal reasons, that use may be taxable. It is important for you as the business owner, to know when you and your employees owe taxes, and when the use is not taxed.

Personal use of a company vehicle is considered a noncash fringe benefit, so the value of the vehicle usage for personal reasons must be included in the employee’s income, and tax must be withheld. This value will need to be reported on the employee’s W-2.

Personal use of a company vehicle includes activities that are not work related such as running personal errands or using the car while on vacation. It also includes commuting to and from work as well as use by a non-employee such as their spouse or dependents. 

There are some cases where personal use of a vehicle is not considered taxable income. Some of the exceptions to personal use tax include:

• De minimis fringe benefits – the employee uses the vehicle for infrequent and brief personal trips making it unreasonable to track their personal use
• Qualified non-personal use vehicles – the vehicle’s design makes it unlikely it would be used for personal use such as a school bus, hearse, construction vehicle, or fire truck
• Demonstration vehicles – a vehicle that is used by a full-time automobile salesperson. This benefit is very restricted, so be sure your employee’s use qualifies for this exemption. To qualify, the personal use may only fall within the greater of 75 miles from the dealership or the actual distance of the employee’s commute, it may not be used for vacation trips, it may not be driven by anyone aside from that employee, and the employee may not store any personal items in the vehicle
  

Vehicles are considered “listed property” under IRC Section 280F. This designation means that separate records must be maintained for business and personal vehicle use. If the employee does not maintain and provide records documenting business and personal mileage separately, the entire value of the vehicle use, including the business use, is considered wages to the employee. 

The determined value of use must be reported at least once each year as income to the employee. The value of personal use of a company car can be determined in a few ways:

• General valuation rule – the general valuation rule is most used. Under this rule, the vehicle is valued at fair market value (FMV). The value is determined based on how much the employee would pay a third party to lease the same or similar vehicle under the same or similar terms
• Cents-per-mile rule – this rule may only be used to determine value if the vehicle is driven a minimum of 10,000 miles annually and the determined FMV cannot be greater than $51,100. To determine cents-per-mile, the IRS standard mileage rate is multiplied by the number of personal miles driven
• Commuting rule – the commuting rule can be used for employees who drive or carpool with other employees in a vehicle owned or leased by the company. It is calculated by multiplying the distance of each one-way commute by $1.50. If multiple employees carpool, this benefit calculation applies to all employees in the carpool. This method can only be used if you require the employee to commute in this vehicle. A written policy must be established and followed stating that the only personal use this vehicle is limited to the commute and de minimis personal use such as an occasional stop for a personal errand while commuting. In addition, automobiles being used by control employees do not qualify for this value rule
• Lease value rule – this method can be used to determine personal use value to be taxed as the annual lease value. The annual lease value is determined using Table 3-1 in IRS Publication 15-B and multiplying the percentage of personal use on the vehicle for the year by the determined annual lease value to arrive at the value of the benefit received. Note that this table includes value for maintenance and insurance, but NOT fuel. If the employer pays for gas, the personal use value must be calculated separately

The circumstances under which you can use each method to value the personal use of a vehicle have many restrictions such as consistency requirements. Check with your tax advisor before deciding on a valuation method for your employees and vehicles to ensure you are using the appropriate method for each situation. While the same valuation method does not need to be used for all company vehicles, if the same employees make use of the same car, the same valuation method must be used for each employee using that car.

Remember to only value the personal use of the vehicle when determining the value of the fringe benefit to your employees. The business use of the vehicle should be excluded as it is not considered taxable income for the employee.

While the benefit is immediately received by the employee when a vehicle is used for personal use, it must be “paid” to the employee at least once annually, although you may choose any frequency that makes sense for your organization. For the purposes of tax withholding, use the non-cash fringe benefit rules.

Make sure your employees keep detailed records of mileage, trip purpose, etc. Clear and accurate records are essential to define what tax is owed for the personal use in addition to providing back-up for any inquiries into wage and tax reporting.

For more information about personal use of a company vehicle, you can view Publication 15-B. Discuss each employee’s personal use in detail with your tax preparer to ensure you are selecting the appropriate personal use value method for each case, and properly reporting and withholding taxes