What happens when the vehicle isn’t used solely for business use?
If an employer-provided vehicle is used for both business and personal use, the substantiated business use is not taxable to the employee however the personal use is considered a fringe benefit and taxable as wages.
There are a couple of options for the government and the employee in this situation. If the employee fully substantiates the business and personal use, the Government has the option to tax only the personal use of the vehicle, OR the employee has the option to reimburse the employer for personal use rather than having it treated as wages.
The Government also has the option to include all use as wages and notify the employee that they are reporting the full amount. Then it is up to the employee to substantiate the business use and deduct it from their – personal tax return, form 1040 schedule A.
Vehicle is Listed Property
Keep in mind that vehicles are considered “listed property” and therefore, in order to support an exclusion from tax, separate records for business and personal mileage are required.
If records documenting business and personal mileage separately are not provided by the employee, the value of ALL use of the vehicle is considered wages to the employee.
In that case, the employee may be able to itemize deductions for any substantiated business use on their personal Form 1040, Schedule A. If an employee records business and personal use separately, only the personal use of the automobile is considered income. This can have a significant impact on employees and is a sizeable incentive for employees to maintain the required documentation.
Commuting is not Valid Use of Vehicle
We have already discussed that commuting between the residence and work is considered personal use. Vacation, weekend use AND use by a spouse or by dependents is also considered personal use.
An exception to personal use limitation is use that qualifies as de minimis. A few examples of excludable de minimis use of an employer-provided vehicle include:
Small personal detours while on business, such as driving to lunch while out of the office on business OR Infrequent personal use.
Infrequent Personal Use of Vehicle
Infrequent personal use is generally less than one day per month. This does not mean that an employee can receive excludable reimbursements for commuting 12 days a year. Keep in mind that this rule is available to cover infrequent, occasional situations.
Let me give you an example to illustrate de minimis use. Say an employee uses a government motor pool vehicle for a business meeting. The government requires employees return motor pool vehicles at the end of the business day, but the employee is delayed and the motor pool is closed when the employee arrives back at the office. The employee takes the vehicle home and returns it the next morning.
Assuming that this is an infrequent occurrence for that employee – generally happening no more than once a month, the commuting value of the trip is a nontaxable de minimis fringe benefit.
However, if this tends to be a frequent occurrence, the commuting is taxable to the employee.
General valuation rule for fringe benefits
Under the general valuation rule for fringe benefits, the amount to include in income is the fair market value.
For vehicle use, fair market value is generally the lease value of the vehicle, which we will discuss in a minute, but other rules may apply in certain circumstances.
There are actually three methods that determine the personal use value of a vehicle. They are:
- The Automobile Lease Valuation Rule
- The Vehicle Cents-Per-Mile Rule AND
- The Commuting Rule
When the employer reports personal use as wages, they must use one of these 3 special valuation rules. Generally, these rules are applied on a vehicle-by-vehicle basis and the employer may use different rules for different vehicles and for different employees.
The first method, the Automobile Lease Valuation Method is calculated by:
- First – Determine the fair market value of the vehicle on the first day it is available to the employee. The employer’s cost, including tax, title, etc. may be used to determine theFMV.
- Then – Use the table in either Reg. §1.61-21(d)(iii) or in Publication 15-B to compute the annual lease value.
- Next – Multiply the annual lease value by the percentage of personal use computed by dividing the personal use mileage by the total miles driven.
- And if fuel is provided, add 5 and a half cents for each mile driven for personal use.
Keep in mind that under this method, other expenses such as the maintenance and insurance costs are included in the rate and cannot be reimbursed separately.
To simplify bookkeeping somewhat, for government entities that have more than 20 vehicles used for business and personal use by employees, a “fleet-average value” may be used to calculate the annual lease valuation.
But, there is a criteria that may make this “Fleet-average” calculation difficult for many Government entities. In 2013, each car must be valued at less than $21,200 to use the fleet –average value. For trucks and vans, that amount is $22,300 per vehicle.
“Cents per Mile” rule
The second valuation method is the “Cents per Mile” rule. To use the vehicle cents-per-mile rule, one of the following tests must be met:
- The employer reasonably expects the vehicle to be regularly used in the trade or business throughout the calendar year, or
- The mileage test is met.
So, looking at the first test, what is meant by “regularly used in the business” To determine this, one of 2 tests must be met.
- First – At least 50 percent or more of the total annual mileage each year is used in the employer’s business, or Second – It is generally used each workday to transport at least three employees to and from work, in an employer sponsored commuting vehicle pool.
You meet the standard if the vehicle is:
- Driven by employees at least 10,000 miles for both personal and business use per year; and
- The vehicle is primarily used by employees
This method has some additional rules that the government must follow in order to use this method. Once the government selects this method, they must continue using the cents-per-mile rule for the vehicle for all later years, unless the employer can use the commuting rule for any year during which use of the vehicle qualifies under that rule.
Commuting Valuation Method
The third method is the Commuting Valuation Method. This method, as the name implies, values the personal use of commuting at a fixed amount per commute for each employee.
The rate per commute is currently set at one dollar and fifty cents each way. Keep in mind that this is a per trip, per person calculation.
So if you have an employee that commutes twice to and from work on the same day it would be calculated as 4 commuting trips at one dollar and fifty cents per trip or six dollars for that day.
If that vehicle had 2 employees commuting twice that day, it would be taxable to both employees at the $6.00 for that day.
In order to use this method, ALL of the following conditions must be met:
- First, the vehicle must be owned or leased by the government;
- the vehicle is provided to the employee for use in performing duties for the government;
- The government requires the employee to commute in the vehicle for a valid non-compensatory business reason;
- The government must also have a written policy prohibiting personal use other than commuting;
- In addition, the government must oversee that the employee does not actually use the vehicle for any personal use other than de minimis personal use;
- And last, the employee who uses the vehicle can not be a control employee which we will discuss in a minute.
Keep in mind that for this method, the employer –requires the employee to use the vehicle for a business purposes; it cannot be voluntary on the employee’s part.
An example of this would be, the government has an employee, who is on call 24 hours a day to respond to road emergencies, and he is required by his employer to commute in a vehicle outfitted with communications or other equipment the employee would need if called out at night. This would fulfill the requirement that the employee is required by the employer to commute in a government vehicle.