As we reach the end of the 2021 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. Personal use of a company vehicle is considered any of the following:
- 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 fully allow the 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 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.
- Employers must determine the value of the fringe benefit (i.e. personal usage) several available methods for accomplishing this are as follows:
- 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 and is subject to not only income taxes, but to Social Security and Medicare tax as well.
Author, Chris Ricker, CPA
Senior Tax Manager
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.