ACCOUNTING FOR EMPLOYEE USE OF COMPANY VEHICLES

JOHN M. WERLHOF
JOHN M. WERLHOF, CPA, serves as a senior manager with GALLINA LLP, an
award-winning CPA and advisory firm serving leading businesses and families
throughout the western United States. John has extensive experience serving clients in
the construction and real estate industries. He has previously authored materials for
Construction Accounting & Taxation and Corporate Taxation. You can reach John at
916-638-1188 or jwerlhof@gallina.com.
Surprisingly, an employee's use of a company vehicle for commuting may be
considered a taxable fringe benefit to the employee, notwithstanding the legitimate
business reasons for allowing or requiring the employee to commute using a
company vehicle.
Many construction contractors allow employees to use a company vehicle to commute between their
residence and job sites. To the surprise of many contractors, an employee's use of a company vehicle for
commuting may be considered a taxable fringe benefit to the employee, notwithstanding the legitimate
business reasons for allowing or requiring the employee to commute using a company vehicle.
1
This article
discusses:

the situations in which an employee's personal use of a company vehicle is taxable;
valuation of an employee's personal use of a company vehicle;
substantiation requirements associated with business and personal use of company vehicles; and
payroll tax reporting of taxable use of company vehicles.
Taxability of personal use of company vehicles
If an employee uses an employer's vehicle exclusively for business purposes and complies with IRS


substantiation requirements, then the employee's use of the vehicle is not taxable to the employee.
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However, any personal use of the employer's vehicle by an employee, including commuting and vacation or
weekend use, is generally considered taxable income to the employee to the extent the employee does not
reimburse the company for the value of the personal use. There are two exceptions:
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1. The value of an employee's personal use of a company car is so small that accounting for such use
would be unreasonable or administratively impracticable.
4
For example, if an employee's only
personal use of a company car is to stop for lunch or a brief personal errand between two business
deliveries, then the employee's personal use would not appear to be taxable.
5
Similarly, if the employee
uses a company vehicle to commute to work on an infrequent basis (no more than one day per month),
then the employee's personal use would not appear to be taxable.
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2. The design of the vehicle lends itself to only a very small amount of personal use by an employee,
including the following vehicles:
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any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds;
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a pickup truck or van weighing 14,000 pounds or less if the vehicle is clearly marked with a company
logo or other advertising and meets one of the following criteria: the vehicle is equipped with (1) a
hydraulic lift gate; (2) permanently installed tanks or drums; (3) permanent shelving that fills most of
the cargo area of a van; (4) permanently installed side boards or panels raising the level of the sides of
the bed of the pickup; or (5) other heavy equipment, such as a generator, welder, boom, or crane; the
vehicle is used primarily for carrying a particular type of load off road and has been specially modified
for such use; or the vehicle is a van that has a seat only for the driver and up to one other person and has
either permanent shelving that fills most of the cargo area or an open cargo area that constantly
(including non-working hours) carries merchandise, material, or equipment used in the employer's
business;
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a bucket truck (frequently referred to as a "cherry picker");
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a cement mixer;
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a crane;
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a delivery truck with seating only for the driver or for the driver plus a folding jump seat;
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a dump truck;
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a flatbed truck;
15
and
a specialized utility repair truck if the truck has shelves, racks, or other permanent interior construction
installed to carry and store heavy items and the employer requires the employee to drive the truck home
in order to be able to respond in emergency situations to restore or maintain electricity, gas, telephone,
water, or sewer utility services.
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If an employee's use of a company vehicle is taxable, then the employer needs to value such use to be able to
comply with applicable tax-reporting requirements.
Valuing personal use of company vehicles
The value of an employee's personal use of a company vehicle is generally determined based on the costs
the employee would have incurred if they had leased or rented a comparable vehicle for a comparable
period.
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Instead of using the comparable lease method, an employer may elect to use any one of the
following three methods to value the employee's use of a vehicle. The first two methods described below
generally yield a lower valuation and are easier to apply than the third method, but the two methods are
available only in limited circumstances.

Commuting value. Personal use of a company vehicle can be valued at a flat rate of $1.50 per one-way
commute if the following conditions are met:
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the vehicle is owned or leased by the employer;
the vehicle is provided to the employee for business use;
the employer requires the employee to commute in the vehicle for business reasons;


the employer has a written policy prohibiting the employee from using the vehicle for personal
purposes other than commuting and incidental personal use (e.g., going out to lunch), and the employee
follows the policy; and
the employee using the vehicle is not one of the following: a director of the employer; an officer of the
employer whose annual compensation equals or exceeds $105,000; an employee whose annual
compensation equals or exceeds $210,000; or a direct or indirect owner of one percent or more of the
equity, capital, or profits of the employer.
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A sample written policy prohibiting personal use of a company vehicle other than commuting and
incidental personal use is included in the sidebar.
Insert Sidebar 1

Cents-per-mile value. Under the cents-per-mile valuation rule, the value of an employee's personal use of a
company vehicle is determined by multiplying the standard IRS mileage rate ($0.56 per mile for 2014;
$0.505 per mile if fuel is not provided by the employer) by the number of personal miles driven during the
year.
20
This approach is available only if the value of the vehicle on the first day it is made available to the
employee is less than a specified amount ($16,000 for cars in 2014 and $17,300 for trucks and vans in
2014). In addition, one of the following requirements must be met to be eligible to use the cents-per-mile
valuation method:

the employer must reasonably expect the vehicle to be regularly used in the business throughout the
year or
the vehicle must be driven by employees at least 10,000 miles per year and driven primarily by
employees.
21

A vehicle is considered regularly used in an employer's business if at least 50 percent of the vehicle's total
annual mileage is for the employer's business or the vehicle is generally used each workday to transport at
least three employees to and from work in an employer-sponsored commuting vehicle pool.
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Annual lease value. The following process is used to calculate the value of an employee's personal use
under the annual lease value method.
First, determine the fair market value of the vehicle for purposes of the annual lease value calculation. The
fair market value for purposes of computing the annual lease value is constant throughout a hypothetical
four-year lease term based on the actual fair market value of the vehicle as of the day the employee begins
using the vehicle. The value for computing the annual lease value of the vehicle is reset based on the fair
market value of the vehicle as of J anuary 1 of the year following the fourth full year of use and every four
years thereafter.
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Exhibit 1 illustrates the date as of which the car would be valued for the purposes of calculating the annual
lease value, assuming the car was initially used by an employee on J uly 1, 2008.

Exhibit 1.
Valuation Date by Period of Use


Next, look up the annual lease value of the vehicle in Exhibit 2 based on the value determined in step one.
Prorate the annual lease value of the vehicle determined in step two based on the number of days during the
year that the employee used the vehicle for a continuous period of 30 days or more.
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Then allocate the
prorated annual lease value determined in step three to the employee's personal use based on the relative
number of personal use miles driven during the year. Finally, if the employer provides fuel for the
employee's personal use of the company automobile, add 5.5 cents per personal mile.
25




Exhibit 2.
Annual Lease Value Table


The employer is not required to use the same method for all vehicles, but generally must apply the method
consistently once adopted for a particular vehicle.
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Substantiating business and personal use of company vehicles
In order to substantiate a deduction for vehicle expenses, an employer can rely on either:

a log of usage of a company vehicle submitted by an employee (e.g., a written record of the date,


mileage, destination, and the purpose of each trip) or
a written representation made by the employee that provides information necessary to determine the
amount of personal and business use of the vehicle (e.g., the total number of business miles, the number
of commuting miles driven, and the number of non-commuting personal miles driven).
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Many employers choose to rely on a quarterly or annual written representation signed by each employee
with access to a company vehicle rather than requiring that employees maintain and submit a detailed log of
the use of each vehicle.
Reporting taxable personal use of company vehicles
The value of any personal use of a company vehicle that is not reimbursed by the employee and that does
not qualify for one of the two exceptions described in the "Taxability of personal use of company vehicles"
section, is considered taxable wages subject to payroll taxes. The employer may elect not to withhold
income taxes on the taxable use of the employer's vehicle as long as the employer notifies the employee,
includes the benefit in the employee's wages on , and withholds social security and Medicare taxes.
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The value of an employee's personal use of a company vehicle can be treated as paid on a pay period,
quarterly, semi-annual, or annual basis.
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Employers have the option of valuing the personal use of a
vehicle on the basis of a fiscal year ending October 31 or November 30, which provides some time at year's
end to compute the value of the personal use of vehicles so that appropriate tax withholdings can be made
before year-end.
30

The value of an employee's substantiated business use, exempt personal use, or reimbursed personal use of
company vehicles does not need to be reported as wages on an employee Form W-2.
The rules associated with employee use of company vehicles are surprisingly complex and are often
overlooked by small- and medium-sized employers. Employers should evaluate their automobile policies
and payroll tax reporting procedures and then revise the policies and procedures as necessary to mitigate the
payroll tax exposures.



Sidebar .Sidebar 1: Sample Automobile Policy
For business reasons, certain employees are required to drive a company-owned vehicle to commute
from their personal residence to work. Employees driving company-owned vehicles may make
incidental stops between business stops. All other personal use of company-owned vehicles is
prohibited.
The vehicle is to be locked when not in use. Any company-owned property should be stored in the lock
box or trunk when the vehicle is not in use. No personal items should be stored in the vehicle.
Employees must report any accident, theft, or malicious damage involving a company vehicle to their
supervisor and the police department, regardless of the extent of damage or injuries, as soon as
possible (but in no event more than 48 hours after the incident).
The company encourages the safe operation of vehicles at all times and expects employees to use good
judgment. While driving a company car, employees are required to:

abide by all traffic laws;
practice defensive driving;
maintain a good driving record;
refrain from the use of a cell phone or any other electronic communication device to write, send, or
read a text-based communication or access the internet while driving, regardless of whether such
use is permitted by law; and
refrain from driving any company vehicle at any time while using or consuming alcohol, illegal
drugs, or prescription medications that may affect their ability to drive.
The company may check driving records at least annually.
The company will compute a daily value for the commuting, which will be included in the employee's
at the end of the calendar year using a valuation methodology that complies with applicable law.



1




I.R.C. 61(a)(1) ; Treas. Reg. 1.61-21(a)(1) .
2


Treas. Reg. 1.132-5(a)(1) .
3


Treas. Reg. 1.61-21(c)(2)(ii) .
4


Treas. Reg. 1.132-6(a) .
5


Treas. Reg. 1.274-6T(a)(2)(i)(D) .
6


Treas. Reg. 1.132-6(e)(2) and -6(d)(3) .
7


Treas. Reg. 1.132-5(h)(1) .
8


Treas. Reg. 1.274-5(k)(2)(ii)(C) .
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Treas. Reg. 1.274-5(k)(7) ; Rev. Rul. 86-97, 1986-2 C.B. 42 .
10


Treas. Reg. 1.274-5(k)(2)(ii)(D) .
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Treas. Reg. 1.274-5(k)(2)(ii)(E) .
12


Treas. Reg. 1.274-5(k)(2)(ii)(G) .
13


Treas. Reg. 1.274-5(k)(2)(ii)(H) .
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Treas. Reg. 1.274-5(k)(2)(ii)(I) .
15


Treas. Reg. 1.274-5(k)(2)(ii)(J) .
16


Treas. Reg. 1.274-5(k)(5) .
17


Treas. Reg. 1.61-21(b)(2) .
18


Treas. Reg. 1.61-21(f)(3)(i) .
19


Treas. Reg. 1.61-21(f)(1)(i)-(v) -Treas. Reg. 1.61-21(f)(1)(i)-(v).
20


Treas. Reg. 1.61-21(e)(1)(i) .
21




Treas. Reg. 1.61-21(e)(1)(i)(A) to (B) and -21(e)(1)(ii).
22


Treas. Reg. 1.61-21(e)(1)(iv) .
23


Treas. Reg. 1.61-21(d)(2)(iv) . Employers with 20 or more cars used by employees for business and
personal purposes can use a "fleet-average value" rather than a tracking value on a vehicle-by-vehicle basis,
provided that the fleet-average valuation is not available for any vehicle whose value on the date it was first
made available in 2014 for employee personal use exceeds $21,300 for a passenger automobile or $22,600
for a truck or van. See Treas. Reg. 1.61-21(d)(5)(v) . Employers who lease automobiles may use the
manufacturer's suggested retail price (including tax and title fees applicable to the purchase of an
automobile) less 8 percent as the fair market value of the automobile for purposes of calculating the annual
lease value. See Treas. Reg. 1.61-21(d)(5)(ii)(C) .
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Treas. Reg. 1.61-21(d)(4)(i)(A) . A special valuation rule applies when a vehicle was continuously used
by an employee for fewer than 30 days.
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Treas. Reg. 1.61-21(d)(3)(ii) . Alternatively, the actual fuel costs paid by the company attributable to
the personal usage could be added. Very few taxpayers would choose to add actual fuel costs because (1)
tracking actual fuel costs is administratively burdensome and (2) at $4.00 per gallon, a vehicle would need
to get at least 72.7 MPG for actual costs to be less than 5.5 cents per mile.
26


Treas. Reg. 1.61-21(c)(2)(iii)(A) and 1.61-21(d)(7) . Employers may use the commuting value method
during any year in which the employer is eligible to use the method, regardless of whether the employer has
used a different method to determine the value of employee use of the employer's car in a previous year.
27




Treas. Reg. 1.274-5T(e)(2)(ii) .
28


I.R.C. 3402(s)(1) .
29


IRS Announcement 85-113, 1985-31 I.R.B. 31 , 1.
30


IRS Announcement 85-113, 1985-31 I.R.B. 31 , 5(a); Treas. Reg. 1.61-21(c)(7) .

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