Taking the Company on the Road

Let’s Review the Tax Implications of Providing Company Cars

For business owners, salespeople and other employees, a company car can be a valuable benefit. Thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), the luxury auto threshold went from $15,800 to an inflation-adjusted $50,000. This means now could be an ideal time to invest in business vehicles. The dollar cap on depreciation deductions for 2019 does not start until a vehicle’s cost exceeds $50,400.

Different Methods to Value Personal Use

If you provide a company car as a fringe benefit, you must include the fair market value (FMV) in employee wages for their personal vehicle use. You can still deduct your full cost as a business expense.

The FMV of personal use is, “the amount the employee would have to pay a third party to lease the same or similar vehicle, on the same or comparable terms in the geographic area where the employee uses the vehicle,” according to the IRS. Three alternative valuation methods can also simplify the process:

1. Cents-per-mile method. With this method, you can multiply a standard mileage rate (58 cents for 2019) by the total miles an employee drives the eligible vehicle for personal use. The value of fuel you provide for miles driven in the United States, Canada and Mexico is included in the standard rate. The rate can be reduced by up to 5.5 cents if you don’t provide fuel. Special rules apply for fuel provided outside the United States, Canada and Mexico. You can use this method if 1) you reasonably expect the vehicle to be used for business regularly, or 2) the vehicle meets certain minimum mileage requirements. Regular use includes at least 50% of business-related mileage or daily use to drive at least three employees to and from work as part of a company-sponsored commuting pool.
2. Commuting method. With this method, you can value personal vehicle use at $1.50 per one-way commute (from home to work, or from work to home). It’s available only if you have a written policy limiting personal use to commuting, minimal personal activities (such as running an errand on the way home from work), and you don’t use the method for “control” employees. Control employees include certain owners, directors and highly compensated employees. Other rules and restrictions apply; ask your tax professional for details.
3. Annual lease value method. The vehicle’s FMV is converted into an annual lease value (using an IRS table) under this method. That amount is then multiplied by the percentage of total miles driven for personal purposes to estimate the value of that personal use. A fleet-average rule allows employers with a fleet of 20 or more automobiles to take the average FMV for all automobiles in the fleet and apply the resulting annual lease value to each eligible vehicle.

Effects of the TCJA

For vehicles whose FMV exceeds certain thresholds, the simple cents-per-mile and fleet-average methods aren’t available. In 2017, for example, the cents-per-mile method’s maximum FMV was $15,900 for passenger cars, and $17,800 for trucks and vans. The fleet-average method’s limit that same year was $21,100 for passenger cars, and $23,300 for trucks and vans.

The IRS recently proposed regulations to align these thresholds with the TCJA’s new luxury auto threshold; they will increase the threshold to an inflation-adjusted $50,000 across the board. Many more employers will then be able to use the cents-per-mile and fleet-average-value methods.

Know Your Options

If you provide company cars for employees, work with your tax advisors to determine the optimal method to compute personal use value for income inclusion purposes. In light of recent rule changes, contact us if you wonder whether your company would benefit from changing your valuation method.

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