Valuing Your Employee’s Personal Use of Business Auto

Whether your company supplies business autos to employees primarily as “perks” or as necessary tools to help them get their work done, their personal use of the auto has tax implications for them and for you. That’s because an employee’s personal use of a company auto generally must be treated as non-cash taxable fringe benefit that is also subject to social security taxes. Fortunately, the tax rules give you some flexibility in valuing personal usage of the company car.

Just as there is many leading car brands to chose from, based on your business situation, you can choose from among four valuation methods:

  1. The general fair market value method, which is based on what a person would pay locally to lease a comparable auto for a period of time comparable to the period of time the employee has use of the car;

  2. The lease value method, which assigns an IRS-determined annual lease value to the auto depending on its value when first provided for the employee’s personal use;

  3. The mileage rate method, which values each personal-use mile at a standard business mileage rate designated by the IRS for the year (54.5 cents per mile for 2018); or

  4. The $1.50 per one-way commuting method.

You cannot use the mileage rate method for an automobile (any four-wheeled vehicle, such as a car, pickup truck, or van) if its value when you first make it available to any employee for personal use is more than an amount determined by the IRS as the maximum automobile value for the year. For example, you cannot use the cents-per-mile rule for an automobile that you first made available to an employee in 2017 if its value at that time exceeded $27,300 for a passenger automobile or $31,000 for a truck or van.

You can only use the commuting method if all the following requirements are met.

  • You provide the vehicle to an employee for use in your trade or business and, for bona fide non-compensatory business reasons, you require the employee to commute in the vehicle. You will be treated as if you had met this requirement if the vehicle is generally used each workday to carry at least three employees to and from work in an employer sponsored commuting pool.

  • You establish a written policy under which you do not allow the employee to use the vehicle for personal purposes other than for commuting or de minimis personal use (such as a stop for a personal errand on the way between a business delivery and the employee’s home). Personal use of a vehicle is all use that is not for your trade or business.

  • The employee does not use the vehicle for personal purposes other than commuting and de minimis personal use.

  • If this vehicle is an automobile (any four-wheeled vehicle, such as a car, pickup truck, or van), the employee who uses it for commuting is not a director or highly compensated employee.

The best method for your situation will depend on factors such as the number of annual personal miles driven, value of the car, and the ratio of personal miles to total miles. Sorting through the maze of these rules is not easy. To ensure you find your way through be sure to contact a tax professional who will guide you and also show you how to minimize associated paperwork.