With the 2023 calendar year coming to a close, there are several year-end tax items an employer should consider, such as the deductibility of company-owned and company-leased vehicles provided to their employees. It is important to keep track of business use and personal use of company vehicles separately. Personal use of a company vehicle is considered any of the following:
- Commuting to and from work (traveling between the employee’s residence and place of work)
- Running a personal errand
- Vacation or weekend use
- Use by a spouse or dependent
There are measures to take regarding taxable fringe benefits permitted for employees and personal use of a company vehicle. Business owners must be diligent in following the IRS guidelines in order to fully allow the deductibility of these vehicle-related expenses. To properly do this, the following procedures should be performed:
- Employees should maintain and provide written summaries of miles driven for both work-related and personal activities for the calendar year. Employers may “cut off” the reporting year in October or November to allow ample time to properly calculate the personal use.
- Important to Note – Per Reg. Section 1.132-5(b), if the employee does not provide records documenting business and personal mileage separately, the value of all use of the automobile is wages to the employee.
- Employers must determine the value of the fringe benefit (i.e. personal usage). Several available methods for accomplishing this are:
- General valuation rule: Using the fair market value of the vehicle
- Cents-per-mile rule: Determining the value based upon personal miles driven times the standard mileage reimbursement rate (which is 65.5 cents per mile for 2023)
- Lease value rule: Using the value of the vehicle on the first day available to the employee for personal use and determining the lease value based upon the Annual Lease Value Table in IRS Publication 15-B
- Commuting rule: Only available in specific circumstances
- Once the value of the fringe benefit is determined, the amount must be included in boxes 1, 3 and 5 of the employee’s Form W-2. This benefit is subject to not only income taxes, but also to Social Security and Medicare tax as well.
For clarification or more information, consult a certified tax advisor.
Author, Chris Ricker, CPA
Director of Tax
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.