An employer can provide an employee with a vehicle to use for business and personal use.  In most cases, the value of the personal use must be reported as income on the employee’s W-2.  There are different valuation rules to determine the fair market value of this fringe benefit. 

Employer-provided vehicles 

If the personal use is limited to commuting only, the employer can use $3 per round-trip to value the commuting use and they must include this in W-2 income and withhold FICA and FUTA taxes.  The employer will not be allowed an additional deduction for the personal use reported to the employee.  To be allowed the commuting valuation, there must be a written policy that prohibits personal use other than de minimis use (i.e. stopping at the store on the way home from work).   Commuting must be required for noncompensatory reasons, such as on-call work or the employee’s closeness to customers.  Also, the employee cannot be a “control” employee.  A control employee is a certain officer, director, or 1% or more shareholder, or someone whose compensation is equal to or greater than $100,000. 

For employees who use the vehicles for part personal and part business use, the most common valuation method is the annual lease value method.  This is the fair market value that would be paid for the vehicle in an arm’s length transaction.  If the employer provides fuel, it is valued at FMV or at 5.5 cents per mile, and this amount must be added to the annual lease value to determine the total amount included in the employee’s income.

Another valuation method is the vehicle cents-per-mile valuation.  The only way to use the method is if the vehicle’s value was less than $12,800 ($14,800 for autos first provided in 2005) when it was first made available to the employee.  Also, the employee must use the vehicle regularly in the business or drive it at least 10,000 miles per year.  The rate includes 5.5 cents per mile for fuel, so if the employer does not provide fuel, the rate should be reduced by that amount.

As mentioned, the employer is not allowed to deduct the value of the noncash benefit reported as income to the employee.  The employer is allowed to deduct the actual costs of providing the vehicle, such as depreciation expense and out-of-pocket costs.

There are certain vehicles which are qualified nonpersonal use vehicles.  Examples are utility repair trucks, emergency vehicles, and specially modified trucks and vans.  If the result of modification is that it becomes unlikely that the employee will use the vehicle for anything but work or de minimis uses, no amount will be included in the employee’s income (Reg §1.274-5T(k)(5) and (7)).

If you have further questions about this topic, please contact a member of our professional staff.