How do you deduct the expenses associated with a company owned vehicle provided to an employee?
To take advantage of special tax deductions, a business client of ours recently leased some cars for their sales employees to use. The monthly vehicle lease on each car is say $200. In addition to the lease payments, the company is paying for all the operating expenses – gas, insurance, repairs, etc. – for the vehicle. While our clients employees use the employer provided cars to make sales calls, the car is not a requirement for these employees to do their jobs.
So how should our client treat the use of the cars by these employees for tax purposes?
To start, our client will need to segment the business and personal use of the cars by the employees. Why?
Because the business use portion is an excludable working fringe benefit. Therefore, there are no tax consequences to the employee provided the proper documentation is maintained (you must require the employee to provide adequate records or documentation evidencing the employee’s use of the vehicle).
On the other hand, the personal use of the car will result in taxable wages to the employee.
How does our client go about allocating the business and personal use?
To identify the personal use, our client would look to the following use of the car by the employee:
- Commuting from the employees home to the office
- Using the car personally on the weekend
- Using the car on vacation
- Use of the car by the employees spouse or dependents
Once it’s determined how much of the employees use is business versus personal, the next step is to calculate the amount that is included as taxable wages to the employee.
There are three complicated methods that can be used to value the personal use:
- Lease Valuation Rule
- Cents Per Mile Rule
- Commuting Rule
An explanation on each of these methods is a separate article in and of itself.
For purposes of this article, however, we’ll explain how the first method can be used to value the personal use.
For example, your employee uses the car for business purposes 10% of the time and for personal use 90% of the time.
Since the lease on the car is $200/month, the allocation would work as follows:
- $20 as a business tax deduction
- $180 as business tax deductible wages to the employee
This same split would apply to the cost of the gas and insurance.
In the end, your business gets to deduct 100% of the vehicle operating costs by virtue of treating the business use portion as a business expense and the personal use as taxable wages to the employee