Many employers provide their employees with vehicles, including cars and trucks, that the employees use to travel for work. Unless employers are careful, employees may be taxed on their use of these vehicles.
Is Use of Employer’s Vehicle Taxable?
As a general rule, employees are not taxed on their use of an employer’s vehicle in discharging their duties even if the employees use the vehicle for incidental and de minimis personal travel, such as stopping for lunch at a restaurant or detouring for a brief personal errand, during the day.
The use of an employer-provided vehicle for commuting and other personal purposes, however, is not business use.
As a result, employees using employer-provided vehicles for personal purposes must include the value of this use in gross income. Commuting is considered to be personal use, even if the vehicle is taken home for the convenience of the employer.
Employers should note that infrequent commuting (i.e.¸ once per month), commuting between home and a temporary work location, and commuting in a “qualified non-personal use vehicle” generally will not cause the use of the vehicle to be taxable. A qualified non-personal use vehicle includes such things as clearly marked police vehicle, ambulances and hearses, delivery vans, specialized repair trucks, and pick-up trucks modified with side rails and lift gates.
What is the Taxable Value of the Employer’s Vehicle?
Generally, the value of a vehicle is equal to its lease value. Because determining this value is difficult, the Internal Revenue Service permits employees to use one of three special valuation rules to determine the amount of their personal use. These special valuation rules are: (a) the commuting value rule; (b) the cents-per-mile rule; and (c) the annual lease value rule. Employers should note that certain “control employees” may not be able to use all of these special valuation rules.
Because vehicles are “listed property,” employees are required to substantiate their personal use of the vehicle by keeping adequate records of their personal use. The failure to keep these records risks the possibility that the entire use of the vehicle may become taxable. Employers, however, may avoid the substantiation requirements by adopting written policies prohibiting any personal use of the vehicle, except for commuting under certain circumstances. If an employer adopts such a policy, it is required to monitor compliance with the policy.
Like all of the fringe benefit rules, the vehicle rules are excessively complex and burdensome for employers. Regardless, employers should take care to comply with these rules, otherwise they may find themselves crying on the way to the bank to pay the IRS.