The business use of the car, which must be thoroughly substantiated with adequate records, is a tax-free "working condition fringe benefit" to the employee. An employer may simplify recordkeeping by maintaining a written policy either prohibiting personal use or restricting personal use to commuting. In such instances, the employee does not have to maintain separate records to substantiate business use and business expenses.
General Rule on Personal Use
If an employer provides a car to an employee that is available for the employee's personal use, generally the value of the personal use of the vehicle is taxable to the employee as income and must be included in the employee's wages. Any purpose other than for the employer's business is considered personal use of the car. Personal use usually also includes commuting to and from work.
Personal use is not "working time." When an employee is using a company car for personal reasons, including commuting to or from work, that employee is not considered to be on "working time" and the time is not used to calculate minimum wage payments or overtime compensation, even if there are incidental duties performed during the operation of the vehicle that are work-related. This is true provided that the personal use is within the normal commuting area for the employer's business or there is an agreement on the part of the employer and the employee.
Personal use value on W-2. An employer must determine the value of the employee's personal use and add the value to the employee's wages as reported on the employee's Form W-2. Under the general income tax and reporting rule, an employer must determine the actual value of the personal use of a company car by January 31 of the year following the personal use.
There are alternative methods of determining personal use value. An employer may report the total fringe benefit value of the vehicle as personal use (either on Form W-2 as part of total wages reported or on a separate Form W-2 or schedule). If 100 percent of the value is included in an employee's income, the employee may then calculate the value of the business expense and deduct the amount on his or her federal income tax return using Form 2106, Employee Business Expenses.
The employer may, in the alternative, determine how much of the use is business and how much is personal. The allocation between business use and personal use of the vehicle can be made on the basis of number of miles driven.
How is the value of the vehicle to the employee determined? Generally, employers may use the general valuation (AKA fair market value) method or one of three special "safe harbor" valuation rules:
1. Annual Lease Value Method
2. Cents-Per-Mile Valuation Method
3. Commuting Valuation Method
Use of a special valuation rule is strictly optional — but the employer must notify employees of its intent to use a special valuation method. Once a special rule is adopted for a particular car, it generally must continue to be used for all years in which the car is available to the employee. The same valuation rules need not be used for all vehicles provided to employees.
General Valuation or Fair Market Value Method
In general, the value of an employer-provided vehicle is the amount the employee would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where the employee uses the vehicle. A comparable lease term would be the amount of time the vehicle is available for the employee's personal use, such as a one-year period.
The fair market value cannot be determined by multiplying a cents-per-mile rate to the number of miles driven, unless the employee can prove that the vehicle could have been leased from a third party on such a basis.
If insurance or a maintenance agreement is furnished with the car, they may be included in determining the fair market value of the car. The value excludes the fair market value of any specialized equipment, such as a telephone, that is added to or carried with the vehicle if the equipment is necessitated by the employer. However, the value of specialized equipment must be included if the employee to whom the vehicle is available uses the specialized equipment in a trade or business other than the employer's.
Special (Safe Harbor) Valuation Rules
1. Annual Lease Value Method
To calculate the "annual lease value" (ALV) of an employer-provided automobile:
- Determine the fair market value of the car, without regard to any group or volume discount, as of the first date on which the car is made available to an employee for personal use.
Select the appropriate ALV based on the car's fair market value from the Annual Lease Value Table.
- Reduce the ALV to reflect periods of unavailability, if any.
- Add the value of all other services provided in connection with the vehicle, except insurance and maintenance which are included in the ALV. Fuel must be valued separately.
- Multiply the ALV, as adjusted, by the employee's percentage of personal use.
Fleet valuation. Employers with a fleet of at least 20 cars may use the fleet average (the average fair market value of all cars in the fleet) to determine the annual lease value of each car in the fleet. An automobile (including vans and trucks) may be included in the fleet only if its fair market value does not exceed a certain amount each year — for 2022, $56,100. This amount is adjusted annually for inflation. If you use the fleet value method, employees are not required to use the same car within the fleet throughout the year. The fleet must be revalued no less frequently than every two years.
Transfer of cars. If, for bona fide business reasons, an automobile is transferred from one employee to another, the ALV may be redetermined based upon the fair market value of the automobile on January 1 of the year of transfer. However, the ALV may not be redetermined upon transfer of the automobile for reducing federal taxes.
EXAMPLE -- An employee is given a car on January 2, with a value of $30,000. The table shows this converts to an ALV $8,250. The employee drives 15,500 miles during the year and reports 11,000 business use miles, leaving 4,500 personal use miles. Divide the 4,500 personal miles by the 15,500 total miles, to get 29.03 percent of personal use. Applying that percentage to the $8,250 yields $2,395.16 of taxable income to the employee.
An additional allocation must be added if the employer is providing fuel for the car. The IRS provides a safe harbor for valuing the fuel at 5.5 cents per mile. The 4,500 personal use miles is multiplied by 5.5 cents to yield a fuel value of $247.50. This is added to the $2,395.16 ALV for a total value of $2,642.66, the amount that would be included in the employee's wages.
Part-year valuation. For periods of continuous availability of less than 30 days, the Daily Lease Value (DLV) must be used. The DLV equals the annual lease value multiplied by a fraction, the numerator of which is 4 times the number of days of availability and the denominator of which is 365. However, a prorated annual lease value may be applied to a period of continuous availability of less than 30 days by treating the automobile as if it had been available for 30 days, if to do so would result in a lower valuation than applying the DLV to the shorter period of actual availability.
2. Cents-Per-Mile Valuation Method
Under the cents-per-mile method, the value of an automobile provided to an employee in the calendar year is the standard mileage rate multiplied by the total number of miles the vehicle is driven by the employee for personal purposes. The cents-per-mile method can be used only if:
- the employer reasonably expects that the car to be regularly used in its trade or business throughout the calendar year, or
- the car is driven over 10,000 miles in that calendar year and the vehicle was used primarily by the employee.
Standard mileage rates. The standard mileage rate is 58.5 cents per mile for all business miles driven in 2022, up from 56 cents per mile in 2021. The cents-per-mile rate includes the fair market value of fuel provided by the employer. However, where fuel is not provided by the employer, the rate may be reduced by no more than 5.5 cents or the amount specified under applicable IRS rules.
For vehicles (including cars, vans and trucks) first made available to employees for personal use in 2022, the cents-per-mile valuation method may not be used if the fair market value exceeds $56,100. This amount is adjusted annually for inflation.
That amount is the fair market value of the car if the employee were to acquire it, not for the employer to acquire it. For example, if an employer buys a large fleet of cars, it may be able to purchase each of them for less than the permitted limit, but the employee could not individually buy the car at that amount. The employee's cost is the amount that must be used. Typically, the blue book value can be used because it is a publicized valuation of vehicles that the IRS will accept for valuation use.
EXAMPLE -- An employee was issued a car on January 4, 2022, with a blue book value of $30,000. The employee drove 15,500 miles during the year, so the 10,000-mile driving requirement and the fair market value requirement have been met. Of the 15,500 miles, the employee reported 11,000 miles of business use for 2022; 4,500 miles were for personal use. The employer also provided fuel, so there is no reduction in the mileage rate.
Applying the cents-per-mile rate to the 4,500 miles of personal use during the year yields $2,632.50 (.585 × 4,500 miles) of income to the employee. The employer can report this income on an annual basis or can report the income during specified periods. However, annual valuation and reporting means that employees will experience a large increase in withholding at the end of the year. The employer might consider spreading the value out across a longer period of time and not allocating the income to an employee all at once at the end of the year.
Note that an employer that adopts the vehicle cents-per-mile valuation rule generally must continue to use the rule for all subsequent years in which the vehicle qualifies for it. However, the employer may use the commuting valuation rule for any year during which use of the vehicle qualifies for the commuting valuation rule.
3. Commuting Valuation Method
The commuting value for the personal use of employer-provided automobiles is $1.50 per one-way commute between home and work or $3.00 per day (which includes the value of any goods or services provided by the employer in connection with the use of the vehicle) for each day the vehicle is used for commuting. If more than one employee commutes in the car (such as an employer-sponsored carpool), $1.50 per one-way commute is includible in the income of each employee. The rule may not be used to value the commuting use of chauffeur-driven cars by passengers, although it may be applied to value the commuting use of the car by the chauffeur.
The commuting valuation rule may be used if:
- the vehicle is owned or leased by the employer and provided to one or more employees for use in the employer's trade or business;
- the employer, for bona fide business reasons, requires employees to commute to and from work in the vehicle (e.g., the need to respond to emergency service calls);
- the employer has established a written policy under which the transportation is not provided for the employee's personal purposes;
- the transportation is not used for any personal reason other than commuting due to unsafe conditions; and
- the commuter receiving the transportation is not a "control employee" of the employer.
Employer-provided transportation for commuting solely because of unsafe conditions, furnished to employees who would otherwise walk to work or use public transportation, must be valued at $1.50 per one-way commute. Unsafe conditions exist if a reasonable person would consider it unsafe to walk to or from home, or to walk or use public transportation, at the time of day the employee must commute. The employer must have a written policy stating that the transportation is not provided for personal use other than commuting due to unsafe conditions. The valuation is only available for employees paid on an hourly basis and who are nonexempt under the Fair Labor Standards Act.
Value of chauffeur service. The personal use value of an employer-provided chauffeur is determined by multiplying the fair market value of the services by the percentage of the chauffeur's total available hours that represents the amount of time actually spent on the employee's personal use. The fair market value is the amount that an employee would have to pay to obtain the same services or the total compensation of the chauffeur. The amount of time that the chauffeur is on call to perform services must also be taken into account. The value of these services is calculated separately from the value of the employer-provided car.
On February 5, 2020, the IRS issued a final regulation on the special valuation rules for determining the amount to include in an employee’s gross income for the personal use of an employer-provided vehicle. The regulation, which reflects changes made by the Tax Cuts and Jobs Act of 2017, codified prior IRS guidance on the values to be used for the fleet valuation method and the cents-per-mile method. It also includes several transition rules for certain employers.
Source: Vital Law, HR Compliance Library, ¶11,743.