Who wouldn’t want a free car? No car payments, no maintenance fees, all free. Sorry to burst your bubble, but company cars do not fall into these categories because of tax implications. If an employee car has never been among the perks you have received, there are many things to know about what they actually “cost.”
For starters, routine guidance states that all fringe benefits are taxable to the employee based on fair market value. The company is responsible for withholding federal income tax, FICA tax and FUTA tax based on the fair market value of the benefit. The fair market value of the vehicle must be calculated at least once per year, although a company may decide to calculate it on a monthly or quarterly basis instead.
There are three different fair market value methods that can be used:
– The Commuting Rule
– Annual Lease Value
The Commuting Rule
If the car is only used for driving to and from work, then this method may be used. The value given to each one-way commute is $1.50. This amount is included in the employee’s taxable wages or the employee can be pay it back to the company. Not only can this car be used only for business purposes, but the employee cannot be considered a control employee (a “high” up employee such as a board member or director).
The standard mileage rate given by the IRS for 2015 is $0.575 per mile driven for business. This rate must either be paid back by the employee to the company for all personal miles driven or included in the employee’s taxable wages. In addition, if the company does not pay for gasoline, the employee can reduce the standard mileage rate by $0.055 per mile. Other rules that apply are that the vehicle must be used for business for at least 50% of the mileage per year, it must be driven for at least 10,000 miles per year, and the vehicle cannot be worth more than $16,000 for a vehicle or $17,500 for a truck or van.
Annual Lease Value
The company must first determine the fair market value of the vehicle on the first day it is available for personal use to an employee. Then, the company must assess what the lease value of the business use of the vehicle is to figure the difference as the amount of the taxable fringe benefit. Afterward, the company can then determine the percentage driven by the employee that was for personal use, based on mileage logs.
To sum it all up, if a company car is presented to an employee, the value of the personal use of the car is treated as a taxable fringe benefit to the employee. On the company’s side, the cost of providing the car will count as a business deduction.