For years, many small to medium-sized companies have considered company-owned autos to be a “popular perk” or fringe benefit. As our two-part Insights on Tax article will explain, having a company-owned auto yields many non-tax as well as tax benefits for the company and the employee. Part I covers some general information for using a company-owned auto, tax consequences of using a company auto for personal use, and the methods for valuing personal use. Part II will focus on the rules for personal use valuation, recordkeeping requirements, and business auto deductions for the employer.
The following is a list of considerations for purchasing or leasing an auto for business use:
- The purchase or lease of an auto through a company will not affect an individual’s credit rating.
- If financing, the interest on the loan is a deductible business expense.
- If using a personal auto for business, the individual will need to provide proof of use and mileage for both personal and business use – thus creating more paperwork. This is not needed if the auto is used exclusively for business.
- Mileage on a company-owned auto is considered a nontaxable working condition fringe benefit to the extent that it is (1) related to employment and (2) substantiated to the employer. This applies for both upscale and economy company autos.
Tax Consequences of Personal Use
For the employee, including employee-owners, the personal use value of a company auto is a taxable fringe benefit, and is included in his or her Form W-2 unless excluded by the Internal Revenue Code. FICA taxes must be withheld on the value (but only the Medicare part of the FICA taxes if the employee is already over the OASDI wage base ($132,900 for 2019)). In addition, if the employee’s wages exceed $200,000 ($250,000 for joint returns, $125,000 for married filing separately) the personal use value will be subject to the 0.9% additional Medicare tax.
For the employer, costs (insurance, oil and gas, maintenance, etc.), incurred in providing the auto to its employee are deductible, not the auto’s value to the employee. The employer may claim a depreciation deduction if the employer owns the auto, or a deduction for leasing costs if it is leased. Due to the value of personal use being treated as income to the employee, the employer must also pay its share of FICA taxes (subject to limitations above). The value may also be subject to federal and state income tax withholding.
Valuing Personal Use on a Company Owned Auto
There are three ways to measure the value of personal use of a company owned auto:
- FMV Method – this method uses the current fair market value of the average costs per year of the auto and uses the percentage out of the year the employee uses it for personal purposes to charge for noncash compensation.
- This would work especially well for leased autos, because the leasing statements per year are easily obtainable and can be added to insurance, maintenance, and possibly gas costs.
- Table Value Method – also known as the annual lease value method, this method requires a fair market value (FMV) as of the date the auto is to be used by the employee. By using the FMV, the annual lease value can be determined and proportioned to the personal use of the employee by the employer through a safe-harbor valuation method:
- If the auto is owned by the employer, the safe-harbor valuation would be the employer’s cost of purchase including all added costs, such as sales tax, title, etc.
- If the auto is being leased by the employer, the safe-harbor valuation would equal to either the reported retail value or the manufacturer’s retail price, minus added costs.
- The employer may also use the manufacturer’s invoice price including options and an additional 4% as to estimate the FMV as a safe harbor
- Once the FMV is determined, the annual lease value is determined based on the dollar range found in Reg. § 1.61-21(d)(2)(i)(B), then proportioned to the employee’s annual personal total mileage. This method excludes the costs of insuring and maintaining the auto as well as other costs such as a driver or chauffeur and can be added to the FMV only if the employer provides them.
- Cents-Per-Mile Method – If the employee’s personal use of an auto is qualified, the employer can value each personal mile used on the auto at 58₵ per mile.
- The standard mileage rate of 58₵ includes the use of the auto as well as the employer’s maintenance, insurance, and gas costs.
- If the employer does not provide or reimburse gas for the employee, the rate will be reduced by 5.5₵, resulting in 52.5₵ per mile.
- There are no reductions for any other expenses that are not covered.
- It also includes the personal miles driven in the United States and its territories, Canada, and Mexico.
- The maximum FMV of an employer-provided auto that can use the Cents-Per-Mile method is $50,400 for 2019.
- Must have the employer’s reasonable expectation that the auto will be used regularly in its trade or business throughout the calendar year or lease period.
- Regular use is defined under the two safe harbors:
- Generally used each workday to transport at least 3 employees in the form of a commuting pool, or
- At least 50% of the miles placed on the auto during the year are for the employer’s business.
- The auto must have been driven at least 10,000 miles throughout the calendar year and is used primarily by employees.
- If the employer owns or leases the auto for less than the calendar year, the mileage requirement is reduced proportionally.
- All use of the auto by employees (including personal use) counts towards the mileage requirement.
- Use of the auto by any persons other the employee (i.e. spouse) is not considered as use by the employee, therefore it will not be taxed to the employee.
Pros and Cons of Valuation Methods
- FMV Valuation Method
- May be used by any employer for any employer-provided auto.
- May mean more work for the employer, especially with more than a few autos.
- The method may be costly for the employee if the auto is only under the employer’s ownership for a relatively short amount of time (such as 2-year leases)
- Table Value Method
- Simplicity; universal table can be used for any auto.
- Bears little resemblance to the current actual lease values as the table has not changed since the first issue in 1985.
- May produce more taxable compensation income for employees than the FMV method.
- Cents-Per-Mile Method
- Easiest to use and saves time.
- May be used by any employee, including owner-employees.
- Cost-saving if the auto’s mileage is low.
- Cannot be used for luxury autos (FMV cannot exceed $50,400)
- If employee’s personal mileage is substantial, the method may cost the employee more than the taxable value method.
If you have any questions about the fringe benefits of company-owned autos, contact the professional at Gilliam Bell Moser LLP