Taxable Fringe Benefits
November 26, 2018
The Internal Revenue Service counts fringe benefits - goods, services, and experiences given to employees in addition to standard wages - as a form of taxable income. In most cases, time spent using your company car for personal use is considered a taxable fringe benefit, and if your small business pays you a salary, you would owe tax on the financial equivalent of that benefit. While purchasing or leasing a car through your company may be a good idea, it may not make much difference if you primarily use the vehicle for personal use. The IRS treats fringe benefits as wages for tax purposes.
Business vs. Personal Use
Using a company car for business purposes is not considered a fringe benefit, while personal use is a taxable fringe benefit. Personal use of a company car includes commuting to and from work, running errands, or allowing a family member who is not a company employee to use the vehicle.
Record Keeping Differences
If an employee does not keep track of mileage in the company car, seperated by personal and business use, then all of her use of the company car is considered a fringe benefit for tax purposes. She would then deduct the cost of using the car for business purposes as an expense on her tax return. If she does keep a mileage record and submit it to her employer, then the IRS only considers the equivalent value of her personal use in addition to her normal wages.
You have three calculations from which to choose: the automobile lease valuation rule, the cents per mile rule, or the commuting rule.
For a leased vehicle, use the automobile lease valuation rule. Determine the fair market value of the vehicle on the first day an employee uses it for personal purposes. Look up the annual lease value in IRS Publication 15-B. Multiply the annual lease value by the percentage of time the employee used that car for personal purposes, relative to her use of it for business purposes.
By the cents per mile rule, each personal mile driven by an employee is considered 54.5 cents in wages, as of 2018. If the business does not provide the fuel for the vehicle, deduct 5.5 cents per mile.
By the commuting rule, each direction of an employee's commute using a business vehicle is considered a $1.50 in wages.
A small amount of personal use of a company car is not considered a fringe benefit. Brief detours while on company business, such as stopping to pick up lunch on the way back to the office from a client's office, are allowed as a business use. Additionally, occasional commuting in a company vehicle, such as being caught in a traffic jam until after the office closes and having to drive the company car home, is not counted as a fringe benefit.
If you have any questions, or would like additional information, do not hesitate to contact our office!