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Tax Implications of Personal Use of Company Vehicles

Rödl & Partner Tax Matters Vol 2017 – 2, republished in July 2024

One of the most confusing areas of tax law is one that impacts most businesses – the deductibility and documentation issues surrounding company vehicles. Additional confusion is introduced when the vehicles are sometimes used for personal reasons. In this Tax Matters*, we strive to reduce the confusion with a few simple concepts that, when put into practice, should help taxpayers mitigate any IRS exposure in this area.

Generally, if a vehicle owned by a company is used for personal reasons by an officer or employee, the officer or employee must treat the value of the personal use as a taxable fringe benefit**. The employer must therefore include the value of the fringe benefit in the taxable W-2 income of the employee, withhold income taxes on the benefit, and subject the income to regular payroll taxes.

When it comes to how much income to impute to the employee for personal use of an auto, businesses do have a few options for implementing a policy and process for personal use of company vehicles:

Cents-per Mile Method
Lease Valuation Method
Commuting Valuation Method

Cents-per Mile Method

This method is available for company vehicles which are intended to be used “regularly” in the course of the company’s business, or vehicles that are actually driven at least 10,000 miles for business purposes during the year. To ease requirements of complying with the “regularly” used in the trade or business rule, a safe harbor rule exists that deems this rule met if at least 50% of the total miles driven during a calendar year are for business use.

Another limitation to using this method is in the value of the automobile being used by the employee. On the date the vehicle is first made available to the employee, the value must be less than the total of all depreciation deductions allowable under §280F, subject to inflation. For 2024, this amount is $62,000 for a passenger auto, truck or van ($60,800 in 2023).

To value personal use under this method, a mileage log must be kept for the vehicle. Business use should be substantiated with: the mileage before and after the business use, the date and time, the destination of travel and the business purpose of the trip. Any mileage not documented as business is deemed “personal” to the employee (including commuting mileage) and is included as taxable compensation to the employee at a standard rate per mile. For 2024, the standard rate is 67 cents per mile (65.5 cents per mile in 2023).

Example: ABC, Inc. owns a vehicle that is used entirely by one salesperson. The salesperson drives the car from his home every weekday morning to each sales call, then returns to his home in the car each evening. The salesperson keeps a mileage log, and the 2024log shows total mileage of 28,000, of which 22,300 is business mileage. ABC, Inc. will include $3,819 in income to the salesperson (28,000 total mileage less 22,300 business mileage multiplied by 67 cents per mile). As such, ABC, Inc. will pay employment taxes on the additional income to the salesperson.

Lease Valuation Method

Another option in valuing the benefit to employees for the use of a company vehicle is the “Annual Lease Value” or “ALV” method. Note that this method can only be used for automobiles and does not apply to other vehicles which may be used by employees.

To use this method, taxpayers refer to an ALV table published by the IRS and apply this value to the value of the auto on the date it was first made available to the employee for personal use. This amount is then multiplied by the percentage of mileage driven for personal use.

Once a value is used for the ALV amount, the taxpayer must use this value for four tax years. The ALV table amounts include the cost of using the vehicle (wear and tear, etc.), as well as maintenance and insurance costs. Fuel costs, however, are not included; therefore, if the employer provides fuel, this cost must be calculated separately (currently at 5.5 cents per mile). The ALV table values can be prorated for any portion of the year that the car is not available to the employee.

Example: In March 2024, ABC, Inc. hired a new sales manager, John. For the first two months of employment, John was in training and did not have use of a company car. Beginning May 1, John was provided the use of a company car valued at $18,000 for business and commuting purposes. John kept a log of mileage which reflected total mileage of 8,000 miles for 2024, of which 6,400 were for business.

ALV tables show a car with a value of $18,000 has a lease value of $5,100 per year. Compensation to John is calculated as follows:

(8,000 – 6,400 miles) / 8,000 miles x $5,100 x (8/12 of a year) = $680

Since ABC also provided fuel for John, fuel costs of $88 are added to the ALV, for a total compensation amount of $768.

Commuting Valuation Method

If a company’s policy states that an employer-provided vehicle is not to be used for any personal use by the employee other than commuting, the employer may use the commuting valuation method to determine the taxable amount of benefits to the employee. For this purpose, the term “employee” does not include a “control employee,” which is defined as an officer, a shareholder owning at least 1% of the company, or a “highly compensated” employee.

This method of valuation applies to all company vehicles, not just automobiles. However, one requirement to use this method is that the employer must require the employee to use the vehicle for business reasons or commuting only*** and the employee must actually limit his use to this requirement.

Under this method, a one-way commute is valued at $1.50 ($3.00 round trip). Therefore, an employer would value the benefit to the employee as the number of commutes multiplied by $1.50 to arrive at the amount includible as income to the employee. If more than one employee commutes in the vehicle, this value applies to each employee.

Summary:

While there are three methods to choose from in determining the value of personal use of a company vehicle that must be included in an employee’s taxable income, some taxpayers may find only one option available to them as their facts and circumstances do not fit within the requirements of the other methods. Taxpayers must take care to ensure their facts have not changed from one year to the next and that they are applying the rules correctly in order to avoid IRS scrutiny in this area.

If you have any questions, please contact your Rödl & Partner office.

* This Tax Matters includes the general rule for company cars. Exclusions and different rules may apply for “no personal use vehicles” (i.e., marked police cars, ambulances or hearses, construction vehicles such as cement mixers, and many farm equipment vehicles, including combines, among many others), demo vehicles, product testing, and other special arrangements.

** Exceptions to this rule do apply. One exception is for employees in the U.S. on a short-term assignment. You should consult with your Rödl & Partner advisor as to whether or not an exception applies.

*** De minimis personal use (such as stopping for lunch during business trips) is allowed.

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisor.

We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user's risk.

Any tax and/or accounting advice contained herein is based on our understanding of the facts, assumptions we have been asked to make, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein.

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