Deductibility of Company-Owned Vehicles

As we reach the end of the 2022 calendar year, 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. Any of the following circumstances, listed below, would be considered personal use of a company vehicle:

 

• Commuting to and from work
• Running a personal errand
• Vacation or weekend use
• Use by a spouse or dependent

 

Business owners must be diligent in following the IRS guidelines in order to allow the full deductibility of these vehicle-related expenses. There are steps to take regarding taxable fringe benefits allowed for employees and personal use of a company vehicle.

 

To track usage properly, make sure the following procedures are applied:

 

• 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 Treas. 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 deemed wages to the employee.

 

• Employers must determine the value of the fringe benefit (i.e. personal usage). There are several guidelines to help establish the monetary worth:

 

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

 

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 employee perk is subject to income taxes, Social Security, and Medicare tax.

 

For clarification or more information, consult a certified tax advisor.

 

Author, Chris Ricker, CPA

Director of Tax

Spiegel Accountancy

 

 

 

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.

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