Explanation of Treatment of Employer Provided Vehicles
Posted 8-17-2010 | Download Article
The following is an explanation of the rules for taxation of employer provided vehicles.
GENERAL RULE
The personal use of an employer-provided vehicle is taxable to the employee. "Personal use" includes commuting, as well as local and out-of-town personal travel. Employees are expected to keep accurate records to substantiate both the business and personal miles driven in employer-provided vehicles.
RECORDKEEPING REQUIREMENTS
The standard for record keeping is that there be "adequate records or sufficient evidence" to support any credit or deduction claimed for business use of an employer-provided vehicle. Examples of acceptable substantiation would be account books, diaries, logs, receipts, bills, trip sheets, expense forms or statements by disinterested witnesses. Records must substantiate the time, date, price, purpose and cost of travel. Written records made at or near the time the expense was incurred have more value than oral substantiation.
Exceptions to Record Keeping Requirement
(a) If an employer has a written policy that vehicles cannot be used for personal use except for commuting purposes, the substantiation requirement is satisfied if the following conditions are met: (1) the vehicle is owned or leased by the employer and is provided to one or more employees; (2) the employer requires the employee to commute to and/or from work in the vehicle; (3) the employer reasonably believes that the employee does not use the vehicle for any personal purpose other than commuting; (4) the employer accounts for the commuting use by including the value of the benefit in the employee's gross pay; and (5) there is sufficient evidence that would enable the IRS to determine whether the use of the vehicle met the four preceding conditions.
(b) Vehicles used entirely for an employer's business by means of a written policy statement barring all personal use except for de minimis personal use (e.g., stopping for lunch between business calls).
(c) Vehicles considered as used entirely for personal purposes. When an employer includes the value of all the employee use of an employer-provided vehicle in the employee's compensation, the employer is excepted from the record keeping requirements. Employees, however, must maintain proper records to substantiate business use in support of deductions claimed for income tax purposes filed on Form 2106.
(d) Qualified non-personal use vehicles. The following types of vehicles are exempted from both the record keeping and taxation requirement. (1) Clearly marked police and fire vehicles; (2) unmarked law enforcement vehicles when used for authorized purposes and operated by a full-time law enforcement officer; (3) delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat; (4) flatbed trucks; (5) cargo carrier with over a 14,000-pound capacity; (6) school and passenger buses with over a 20-person capacity; (7) ambulances; (8) hearses; (9) bucket trucks; (10) cranes and derricks; (11) forklifts; (12) cement mixers: (13) dump trucks; (14) garbage trucks; (15) specialized utility repair trucks; (16) tractors; and (17) refrigerated trucks, and (18) certain pickup trucks and vans not over 14,000 pounds loaded gross vehicle weight (see Definitions).
WITHHOLDING REQUIREMENTS
Employers have the option not to withhold income taxes (but they must withhold social security taxes) on the imputed value of an employee's personal use of an employer-provided vehicle if the employer meets two criteria: (1) the employee must be notified of the decision not to withhold by January 31 of the taxable year; and (2) the employer must include the value of the employee's personal use of the vehicle in the gross pay recorded on the worker's W-2 form at the end of the year. Social security taxes, which must be withheld, and income taxes, which may be withheld, can be withheld and remitted on a pay period, quarterly, semi-annual or annual basis.
Employers may use a special accounting rule under which the value of the benefit for the last two months of the year is treated as received in the following tax year.
VALUATION OF PERSONAL USE OF EMPLOYER-PROVIDED VEHICLE
There are three special valuation rules that can be used to determine the value of vehicle use: annual lease value rule, vehicle cents per mile rule, and commuting valuation rule.
Notification
Employers are required to notify employees of (1) the special valuation rule or rules they intend to use, (2) the applicable substantiation requirements, (3) the effect of failing to comply with the substantiation requirements, and (4) election not to withhold or change of election. The notice must be provided in a manner reasonably expected to come to the attention of all affected employees (e.g., a mailing or with employees' paychecks).
Notification to employees must be made by the later of January 31 of the calendar year the rule is to apply or 30 days after the benefit is first provided to the employee. Employers who provide adequate notification to employees need not notify employees of their intention to continue using a particular valuation rule in a subsequent year.
An employer who fails to provide the requisite notice may use a special valuation rule only if the employer receives a statement from the non-notified employee by January 31 of the year following the year for which the notice was not provided. The statement must indicate that the employee knows (1) that the employer intends to use a particular valuation rule for that year, (2) the applicable substantiation requirements, and (3) the effect of a failure to comply with such requirements. Employees should use the same valuation rule that the employer uses unless an employee wants to determine the value by using general facts and circumstances.
Commuting Valuation Rate
Under this rule, a flat $1.50 each way ($3.00 per round-trip commute) can be charged to employees if the following criteria are met: (1) the vehicle is used in connection with the employer's business; (2) the employer requires the employee to commute to and/or from work in the vehicle; (3) the employer has a written policy prohibiting personal use other than commuting and de minimis personal use and the employee does not use the vehicle for any other personal use and (4) the employee is not a "control employee" (see Definitions).
If more than one employee commutes in a vehicle, each rider is to be charged the $1.50 each way. A vehicle that is generally used each workday to transport at least three employees to and/or from work in an employer-sponsored commuting pool is deemed to meet the business use requirement described above.
Annual Lease Value Rule
Personal use of automobiles made available for more than commuting purposes can be computed using this rule. It is a four-step process. First, the fair market value (FMV) as of the date the automobile is first made available for personal use must be established. If the employer owns the vehicle, the purchase price, which includes sales tax, if any is paid, and title fees associated with the purchase, is the FMV. The FMV of a leased automobile is either the retail value that is reported by a nationally recognized pricing source or the manufacturer's suggested retail price less eight percent. Once the FMV is established, the following table can be used to establish the annual lease value (ALV). This ALV is to be used for a four-year period.
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Fair Market Value
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Lease Value
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Fair Market Value
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Lease Value
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$0-999
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$600
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$22,000 - $22,999
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$6,100
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1,000 – 1,999
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850
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23,000 – 23,999
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6,350
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2,000 – 2,999
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1,100
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24,000 – 24,999
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6,600
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3,000 – 3,999
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1,350
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25,000 – 25,999
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6,850
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4,000 – 4,999
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1,600
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26,000 – 27,999
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7,250
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5,000 – 5,999
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1,850
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28,000 – 29,999
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7,750
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6,000 – 6,999
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2,100
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30,000 – 31,999
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8,250
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7,000 – 7,999
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2,350
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32,000 – 33,999
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8,750
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8,000 – 8,999
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2,600
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34,000 - 35,999
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9,250
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9,000 – 9,999
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2,850
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36,000 – 37,999
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9,750
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10,000 – 10,999
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3,100
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38,000 – 39,999
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10,250
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11,000 – 11,999
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3,350
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40,000 – 41,999
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10,750
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12,000 – 12,999
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3,600
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42,000 – 43,999
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11,250
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13,000 – 13,999
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3,850
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44,000 – 45,999
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11,750
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14,000 – 14,999
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4,100
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46,000 – 47,999
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12,250
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15,000 – 15,999
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4,350
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48,000 – 49,999
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12,780
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16,000 – 16,999
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4,600
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50,000 – 51,999
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13,250
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17,000 – 17,999
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4,850
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52,000 - 53,999
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13,750
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18,000 – 18,999
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5,100
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54,000 – 55,999
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14,250
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19,000 – 19,999
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5,350
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56,000 – 57,999
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14,750
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20,000 – 20,999
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5,600
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58,000 – 59,999
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15,250
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21,000 – 21,999
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5,850
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* For vehicles having a fair market value in excess of $59,999, the annual lease value is equal to 25% of fair market value + $500.
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Step two is to calculate the difference between personal and business mileage and to create a fraction that represents business use. The difference between the total miles and the personal miles driven by the employee is the numerator. The denominator is the total miles driven by the employee. Step three determines the value of business use by multiplying the ALV by the mileage fraction. Step four is to calculate the value of the benefit to be included in the gross pay of the employee by subtracting the business use from the ALV.
Example
1. ALV: Employee A is provided an automobile with FMV of $17,500 and a corresponding ALV (using chart) of $4,850.
2. Fraction: Employee A drove a total of 10,000 miles, 2,000 of which were for personal use.
Numerator: 10,000 - 2,000 = 8,000 business miles
Denominator: 10,000 total miles driven
3. Business Use: ALV x mileage fraction
$4,850 x 8,000 = $3,880
10,000
4. Value of the benefit to be included in gross income:
ALV - Business Use
$4,850 - $3,880 = $970
The ALV includes maintenance and insurance but not gasoline. If the employer pays for gasoline used to drive personal miles, the value must be added to the value of the vehicle benefit included in the employee's gross income. The gasoline value is an additional 5.5 cents per mile if the gasoline is provided in kind, or the actual cost if the employee is reimbursed for the cost of gasoline.
Once the automobile lease valuation rule has been adopted for an automobile by an employer, the rule must be used by the employer and employee for all subsequent years in which the employer makes the automobile available to any employee.
The Annual Lease Value of automobiles under this rule must be recalculated every four years, using the Annual Lease Value Table corresponding to the appropriate dollar range in the Fair Market Value column. The four-year period is determined from the date the special valuation rule is applied by the employer to December 31 of the fourth full calendar year following that date. Each subsequent four-year period for the automobile runs from January 1 following the end of the previous period to December 31 of the following fourth full year. For automobiles that are being re-valued, the FMV is the value as reported by a nationally recognized pricing source as the date of the vehicle is first available for personal use.
Vehicle Cents-per-Mile Valuation Rule
The vehicle cents-per-mile rule allows the value of personal use to be calculated by multiplying the number of personal miles driven by the standard mileage allowance. The standard mileage rate is provided by the Internal Revenue service in a Revenue Ruling or Procedures and is to be applied prospectively to the taxable year following the date of publication of the Ruling or Procedure. The 2009 rate is 55 cents per mile. The 2010 rate is 50 cents per mile. This standard rate includes gasoline, insurance and maintenance. If the employer does not supply gasoline, the above rates are reduced by 5.5 cents per mile.
The cents-per-mile method may be used to value employee use of an employer-provided vehicle only if:
(1) the employer reasonably expects that the vehicle will be regularly used in its trade or business throughout the calendar year (or a shorter period during which the employer owns or leases the vehicle); or
(2) the vehicle is driven at least 10,000 miles in a calendar year, and it is used primarily by employees.
(3) the fair market value of the vehicle on the date it is first made available to any employee for personal use cannot exceed the maximum recovery deductions (as adjusted for inflation) allowable under Code Section 280F for the first five tax years the auto is in service ($15,000 for passenger automobiles and $15,200 for trucks or vans for 2009).
For purposes of the "regular use in business" test, infrequent use of a vehicle, such as for trips to the airport or trips between an employer's various business premises, is not regular use of the vehicle in the employer's trade or business.
Under two safe harbors, a vehicle is considered regularly used in an employer's business:
(1) if the vehicle is generally used each workday to transport at least three employees in an employer-sponsored commuting vehicle pool, or
(2) if at least 50% of the miles placed on the vehicle during the year are for the employer's business.
For purposes of the "10,000 mile" test, a vehicle is considered primarily used by employees if it is used by employees on a consistent basis for commuting. If the employer owns or leases a vehicle for less than a calendar year, the mileage requirement is reduced proportionately.
Example
1. Standard Mileage Rate: In 2009 employee A drives 20,000 personal miles and also drives 35,000 business miles. The standard mileage allowance for the personal miles driven during 2009 is 55 cents per mile.
2. Amount of benefit to be included in gross income is:
20,000 miles x .55 = $11,000
Fleet Average Valuation Rule
If an employer has an automobile fleet of 20 or more vehicles and the vehicles are regularly used for business, a special fleet-average rule may be used for calculating the Annual Lease values of the automobiles in the fleet. The rule may be used only if no automobile in the fleet has a fair market value in excess of $16,500, adjusted beginning in calendar year 1989 by the automobile price inflation adjustment figure ($19,900 for passenger automobiles and $19,900 for trucks or vans for 2009). The regular business use requirement is the same as for the cent-per-mile rule. An employer may set up separate fleets for lesser and more expensive vehicles as long as the regular business use and $19,900 value requirements are met. Under this rule, if gasoline is provided, it may be valued at 5.5 cents per mile if determining actual fuel costs would impose an unreasonable administrative burden.
Shared Vehicle Usage
If an employer provides a vehicle to employees for use by more than one employee at the same time, such as an employer-sponsored commuting pool, the employer may use any of the special valuation rules that may be applicable. The employer must use the same special valuation rule for each employee who shares such use and must allocate the value among the employees who share use of the vehicle including the employee who drives the vehicle, unless, the employee does not perform other services for the employer.
DEFINITIONS
Automobile - Any four-wheeled vehicle manufactured primarily for use on public streets, roads, and highways.
Clearly marked police and fire vehicle - A Vehicle owned or leased by a governmental unit that is required to be commuted in by a police officer or firefighter who is on call when not working. The vehicle is clearly marked if "through a painted insignia or words it is readily apparent that the vehicle is a police or fire vehicle." Governmental license plates alone will not satisfy this requirement.
Qualified specialized utility repair truck - Any truck (not including a van or pickup truck) specifically designed and used to carry heavy tools, testing equipment, or parts if--
(i) the shelves, racks, or other permanent interior construction which has been installed to carry and store heavy items is such that it is unlikely that the truck will be used more than a de minimis amount for personal purposes, and
(ii) the employer requires the employee to drive the truck home in order to be able to respond in emergency situations or for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services.
Qualified non-personal use pickup truck - A pickup truck with a loaded gross vehicle weight not over 14,000 pounds if its is clearly marked with permanently affixed decals or special painting or other advertising associated with the employer's trade, business, or function and is --
(i) equipped with at least one of the following: a hydraulic lift gate, permanently installed tanks or drums, permanently installed side boards or panels materially raising the level of the side of the bed of the pickup truck, or other heavy equipment, such as an electric generator, welder, boom, or crane used to tow automobiles and other vehicles; or
(ii) actually used primarily for transporting a particular type of load other than over the public highway in connection with a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation, and has been specially designed or modified to a significant degree for such use.
Qualified non-personal use van - A van with a loaded gross vehicle weight not over 14,000 pounds that is clearly marked with permanently affixed decals or with special painting or other advertising associated with the employer's trade, business, or function, and has a seat only for the driver and one other person, and either permanent shelving has been installed that fills most of the cargo area or the cargo area is open and the van constantly (during both working and non-working hours) carries merchandise, material, or equipment used in the employer's trade, business, or function.
Control employee - Under the final regulations, a control employee of nongovernmental employer is any employee who (1) is a board-appointed, shareholder-appointed, confirmed or elected officer of the employer (this class is limited to the lesser of 1% of all employees or 10 employees) whose compensation equals or exceeds $50,000; (2) is the director of the employer; (3) owns a 5% or greater equity, capital or profits interest in the employer; and (4) is among the top 1% most highly-paid employees (the term employee does not include any individual who is not a common-law employee, partner, or 1% or greater shareholder of the employer) of the employer up to a maximum of 50.
Under the final regulations, a control employee of a governmental employer is any elected official or an employee whose compensation equals or exceeds the compensation paid federal government employees holding an executive-level V position.
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