Company Car as an Employee Benefit

If you have a nondeductible/nonbusiness commute that is extensive, or significant business-related travel, you may want to look into whether your employer provides employees with the use of a company car. If you use a company car for business-related purposes, it can qualify as a working condition fringe benefit. A working condition fringe benefit includes any property or service that your employer provides to you such that if you paid for the property or service, you could deduct it as a business expense. Your employer does not have to include the value of a working condition fringe benefit from your gross income. However, if you use the car for personal reasons, it qualifies as a non-working condition fringe benefit and your employer must include the value of your personal use of the car in your gross income. There are two ways for your employer to determine the value of a company car to include in your gross income: the general valuation rule and the special valuation rules.

General Valuation Rule

If you use the car for personal use, your employer can determine the value of the company car fringe benefit by using the general valuation rule. Under the general valuation rule, your employer must include, in your gross income, any amount by which the fair market value (FMV) of a fringe benefit is greater than:

  • The amount you paid for the benefit, and
  • The amount excluded by some other section of the Internal Revenue Code.

The FMV of a company car is the amount you would have to pay a third party to lease the same or a similar car in similar circumstances.

Special Valuation Rules

In addition to the general valuation rule, your employer may also elect to determine the value of your personal use of a company car to include in your gross income by using the special valuation rules.

Annual Lease Value

If your employer provides you with a company car for an entire year, he or she can use the car’s annual lease value (see the Annual Lease Value table in Section 1.61-21(d) of the Federal Tax Regulations) in order to determine the value of the car to include in your gross income. If your employer provides you with a car for less than one year, the value of the benefit to include in your gross income is either that of a prorated annual lease or a daily lease value.

Vehicle Cents-Per-Mile Rule

Another way for your employer to determine the value of the company car is to use the vehicle cents-per-mile rule. Under the vehicle cents-per-mile rule, your employer values the car by using a standard mileage rate (56.5 cents per business mile for 2013) and multiplying it by the total miles you drive for personal reasons.

Commuting Rule

The commuting rule values the use of a company car at $1.50 per one-way commute for each employee who commutes in the car.

If your employer provides you with transportation due to unsafe conditions, the value of the use of the transportation is $1.50 per one-way commute.

Deductibility of Car Expenses

If your employer does not provide you with a company car, you may still be eligible for a tax deduction if you use your car for business purposes. You are allowed to deduct expenses you incur while using your car for business purposes. There are two ways for you to determine the expenses you incur while using your car for business purposes: actual expenses and the standard mileage rate.

If you qualify for a deduction under both actual expenses and the standard mileage rate, you should determine your deduction using both methods to determine which one gives you a larger deduction. If you use your car for both business and personal purposes, you must divide your expenses between business and personal use.

Example:
Bill Smith drives his car 10,000 miles during the year, 8,000 for business use and 2,000 for personal use. Bill can claim an 80 percent deduction (8,000/10,000) of the cost of operating his car as a business expense.

If you deduct the business use of a car, or your employer excludes the value of the car from your gross income, the IRS will require you to substantiate it with records. The records should contain the date of each use, mileage, and the business purpose of the trip. Records must be kept at or near the time of the use. If there are no written records, you may provide a statement containing specific information related to the car’s use or other corroborative evidence sufficient to establish use. Without written records, the IRS may disallow the exclusion.

At Henssler Financial we believe you should Live Ready, which includes understanding how your fringe benefits may affect your taxes. If you have questions regarding the possible taxation of your benefits, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.

Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.

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