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 covered 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 focuses on the rules for personal use valuation, recordkeeping requirements, and business auto deductions for the employer.
Rules for Personal Use Valuation Methods
An employer is not required to be consistent in what method it uses for an auto that accrues any personal use, but generally an auto must stick with the method it uses for the rest of its useful life until disposal. Therefore, the election is binding to the auto for all periods regardless of the employee it is made available to.
For example, Employer A has two autos – car 1 and truck 1. These two vehicles may use two different methods – car 1 may use the fair market value (FMV) method while the truck may use the cents-per-mile method. Once elected, Employer A cannot change car 1’s method from FMV to cents-per-mile. Car 1 must continue to use the FMV method, but Employer A may elect to use the cents-per-mile after purchasing car 2.
This election for valuation must be made on the first day the vehicle is made available to any employee. However, there may be a “one-time exception.” The IRS said in Notice 2019-34 that if an employer does not qualify under Reg § 1.61-21(e)(5) to use the cents-per-mile method on the first day the vehicle is made available to an employee for personal use because of pre-2018 rules that say the vehicle had an FMV over the maximum threshold allowed under Reg §1.61-21(e)(1)(iii), the employer may begin to use the cents-per-mile method in the 2018 tax year based on the FMV of the vehicle for the purposes of the rule carried in Notice 2019-34.
Regardless of the method, the only way to differentiate employment-related business driving (nontaxable fringe benefit) and personal driving (taxable fringe benefit) is based on mileage.
It is recommended that an employee keep a log of their usage for business purposes of the vehicle in the form of time, place, mileage, and business purpose. These entries are used to establish the nontaxable fringe benefit of the employee’s usage. It is also recommended that an employee should keep track of beginning and ending odometer readings for the periods of time involved for business use, as the difference of total mileage and employment-connected business mileage is used as personal mileage, which is treated as a taxable fringe benefit compensation income.
Business Auto Deductions for the Employer
If personal use is treated as compensation income, the employer may deduct all costs incurred to supply that benefit. In other words, if all personal use by the owner or employer that purchased the vehicle (and members of his or her family) is properly treated as taxable fringe benefit, the auto can be treated as if it were used 100% for business. This means that the employer or owner may deduct 100% of its operating expenses such as oil, gas, repairs, and maintenance costs. The employer or owner may also claim all allowable depreciation deductions and lease deductions that he or she may not be able to otherwise.
However, “luxury autos” have depreciation deduction limits, therefore employers and owners that purchase these types of vehicles will have restrictions on depreciation and Code Sec. 179 expensing deductions. Luxury autos are defined as passenger automobiles which are manufactured primarily for use on public streets and highways and weigh 6,000 pounds or less unloaded. The restriction on depreciation and Code Sec. 179 expensing deductions for new or used luxury autos placed in service in 2019 is limited to $18,100 in the first year, $16,100 for the second year, $9,700 for the third year, and $5,760 for each year following. There are no bonus depreciation restrictions on heavy SUVs, defined as an SUV with a gross vehicle weight rating of over 6,000 pounds, therefore a taxpayer may write off the entire cost of heavy SUVs placed in service in 2019 using 100% first-year bonus depreciation.
If the vehicle is used by a more-than-5% company owner, the first-year limits only apply if actual business use is over 50% of the vehicle’s total use for the year. This number excludes the compensation income from personal use of the vehicle. If the vehicle does not exceed 50% or the employer or owner decides not to use the bonus first-year depreciation, the depreciation for the vehicle placed in 2019 will be limited to $10,100.
For vehicles leased for owners or key employees, the business may deduct the full lease payment if personal use on the vehicle is treated as compensation income. However, if the term of the vehicle lease begins in 2019 and is priced above $50,000, the business must include a certain amount in income during each year of the lease. This amount is based on the initial FMV of the vehicle, term and year of the lease, and is adjusted for inflation. To find the portion of income for passenger vehicles, see Table 4 of Rev Proc 2019-26.
Eligible businesses may deduct business-related expenses of leased and purchased autos such as vans, pickup trucks, and panel trucks using a standard mileage rate instead of deducting actual expenses and depreciation. This can create a fixed rate based on the usage of the vehicle, which is 58¢ a mile for 2019. If personal use is treated as compensation income, personal use miles may also count as business mileage. However, the method is only available for use if certain criteria are met, such as autos that have not been written off in a previous year using accelerated depreciation, or if the business simultaneously uses over four vehicles.
The deduction is a replacement to all other costs of the vehicle, such as depreciation or lease costs, maintenance and repairs, tires, gas, oil, insurance, and registration fees. The taxpayer also has the option to deduct parking fees and tolls related to business use of the vehicle along with the mileage rate deduction. Therefore, this method may not be beneficial if all other costs outweigh the mileage rate cost.
If you have any questions about the fringe benefits of company-owned autos, contact the professional at Gilliam Bell Moser LLP