Company Car as an Employee Benefit

If you have a nondeductible/nonbusiness commute that is extensive, or significant business-related travel, you may want to look into whether or not your employer provides employees with the use of a company car. If you use a company car for business-related purposes, it can qualify as a working condition fringe benefit. A working condition fringe benefit includes any property or service that your employer provides to you such that if you paid for the property or service, you could deduct it as a business expense. Your employer does not have to include the value of a working condition fringe benefit from your gross income. However, if you use the car for personal reasons, it qualifies as a non-working condition fringe benefit and your employer must include the value of your personal use of the car in your gross income. There are two ways for your employer to determine the value of a company car to include in your gross income: the general valuation rule and the special valuation rules.

General valuation rule

If you use the car for personal use, your employer can determine the value of the company car fringe benefit by using the general valuation rule. Under the general valuation rule, your employer must include, in your gross income, any amount by which the fair market value (FMV) of a fringe benefit is greater than:

1. * The amount you paid for the benefit, and
2. * The amount excluded by some other section of the Internal Revenue Code

Basically, the fair market value of a company car is the amount you would have to pay a third party to lease the same or a similar car in similar circumstances.

Special valuation rules

In addition to the general valuation rule, your employer may also elect to determine the value of your personal use of a company car to include in your gross income by using the special valuation rules.

Annual lease value

If your employer provides you with a company car for an entire year, he or she can use the car's annual lease value (see the Annual Lease Value table in Section 1.61-21(d) of the Federal Tax Regulations) in order to determine the value of the car to include in your gross income. If your employer provides you with a car for less than one year, the value of the benefit to include in your gross income is either that of a prorated annual lease or a daily lease value.

Vehicle cents-per-mile rule

Another way for your employer to determine the value of the company car is to use the vehicle cents-per-mile rule (your employer values the car by using a standard mileage rate and multiplying it by the total miles you drive for personal reasons.)

Commuting rule

The commuting rule values the use of a company car at $1.50 per one-way commute for each employee who commutes in the car. If your employer provides you with transportation due to unsafe conditions, the value of the use of the transportation is $1.50 per one-way commute.

Deductibility of car expenses

If your employer does not provide you with a company car, you may still be eligible for a tax deduction if you use your car for business purposes. There are two ways for you to determine the expenses you incur while using your car for business purposes: actual expenses and the standard mileage rate. If you qualify for a deduction under both actual expenses and the standard mileage rate, you should determine your deduction using both methods in order to see which one gives you a larger deduction. If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. If you deduct the business use of a car, or your employer excludes the value of the car from your gross income, the IRS will require you to substantiate it with records. The records should contain the date of each use, mileage, and the business purpose of the trip. Records must be kept at or near the time of the use. If there are no written records, you may provide a statement containing specific information related to the car's use or other corroborative evidence sufficient to establish use. Without written records, the IRS may disallow the exclusion.

Example 1: Bill drives his car 10,000 miles during the year, 8,000 for business use and 2,000 for personal use. Bill can claim an 80 percent deduction (8,000/10,000) of the cost of operating his car as a business expense.