Employer-Provided Vehicles: Tax Implications of Personal Use
Kelly Huggins, Tax Senior Manager
As noted in last month’s article titled “Business Use of Vehicles: Keeping Adequate Records Under Two Alternative Methods,” this article will discuss business versus personal use and some tax implications of using a company vehicle for personal use.
What is business use?
An expense will qualify for business use if it is ordinary and necessary for your trade or business. Ordinary means that the expense is common and accepted within your line of work. Necessary means that the expense is helpful in conducting your business; it doesn’t have to be fundamentally essential to operations.
An expense is not considered business related if it was incurred with a personal, living, or family purpose. An example of personal vehicle use would be commuting mileage or costs to get to and from work. However, there are three exceptions to this commuting rule:
- If an individual works at two or more different places in one day, the mileage or cost incurred in getting from one workplace to the other are deductible as a business expense.
- If an individual has at least one regular workplace away from his or her home but is traveling to a temporary location to do work within the same trade or business, the mileage or cost is deductible. Temporary means that there is no realistic expectation of working at that location for a year or more. If an individual has been traveling to a temporary location but realizes that it will not be temporary after all (due to changes in circumstances, etc.), the mileage or cost incurred during the time the taxpayer realistically expected it to be a temporary work location is still deductible.
- If an individual’s primary place of business is a home office, mileage or costs to get to another work location for the same trade or business are deductible.
In some situations it makes sense for a company to give its employees company owned or leased vehicles for their everyday use. If you’re an employee who drives an employer-provided vehicle, you should be aware of some tax implications if you also use the vehicle for personal use.
When an employer provides a vehicle to an employee with no restrictions on the use, it is assumed that the vehicle will be driven for both business and personal reasons (commuting to and from work, for business during work days, and personally on the weekends and outside of work hours). Personal use of the company-provided vehicle is considered to be a fringe benefit for the employee – a form of “non-cash” compensation. Because of this, the employer should report the value of the employee’s personal use of the vehicle in the employee’s wages (included in box 1 on Form W-2).
This concept is important for small businesses to keep in mind. An S Corporation with two shareholders, for example, each using a company-owned vehicle, must account for the business versus personal use of the vehicles. If the S Corporation purchased or leases the vehicles, depreciates them and takes deductions for all related expenses, the employee-shareholders are receiving a fringe benefit for the personal use of the vehicles. The employee-shareholders should be including the value of that personal use as income on their personal returns.
In the above situation, the business has the option to include 100% of the value of the vehicle in the employee’s wages or only the amount attributable to the employee-shareholder’s personal use. If the business reports 100% of the value of the vehicle, this amount is required to be separately stated on the employee-shareholder’s W-2 (in box 14). In this case, the employee-shareholder is able to deduct the business use of the vehicle (calculated using the actual expense method) on his or her individual return.
The other option is for the business to include only the value associated with the employee’s personal use on their W-2. In this case, the employee-shareholder would only be including in income the amount associated with their personal use and, therefore, would not deduct any expenses for business use on his or her individual return (unless there are some additional expenses unreimbursed by the employer).
In either situation it is important that employees keep adequate records (as discussed in last month’s article) of their business versus personal use. Employers who provide company vehicles to their employees should require them to maintain mileage logs and appropriate evidence of their use if they wish to include only the value of the employee’s personal use in their W-2’s. If employers include 100% of the value in the employee’s W-2, it is still important for the employee to keep the necessary records in order to take a deduction related to their business use on their personal returns.
Please contact your BNN tax advisor at 1.800.244.7444 if you would like to discuss this topic further or have any questions about your specific situation.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.