COMPLIANCE
The cost of using the company car GLOBAL PAYROLL
Ronald L. Moser CPP, payroll / employee benefits consultant, Taxing Matters, discusses tax implications when employees use company cars for private use*
A llowing your employee to use a company car for personal use is treated as a taxable benefit. To value that benefit, the Internal Revenue Service (IRS) provides a general valuation rule. Under this rule, the value of the fringe benefit is the fair market value (FMV). FMV is the amount an employee would have to pay a third party in an arm’s length transaction to buy or lease the automobile. To help limit the tax implications of this method, the IRS also provides three special valuation rules: l cents-per-mile
The commuting valuation rule For the commuting valuation rule, determine the value of a vehicle provided to an employee for commuting by multiplying each one-way commute by $1.50. "Finally, it’s important that employers and employees keep adequate records. The employee should log the business use of the vehicle for each trip including the date, business purpose of the trip, and mileage" To use this method, the following conditions must be met: l the employee can’t be a ‘control employee’ (e.g., a corporate officer earning at least $130,000 in 2023, a director, a 1% owner) l employers must have a written policy to limit driving of the company vehicle between work and home l driven by an employee for non- compensatory business reasons. The annual lease value rule The annual lease value rule involves determining how much it would cost to lease a comparable car on the same
terms. The annual lease value table (ALVT) is used to determine the lease value using the following four steps: l step 1: determine the FMV of the car as of the first day it was made available to any employee for personal use l step 2: find the car’s FMV in the ALVT l step 3: calculate the percentage of personal miles driven during the year (personal miles driven / total miles driven) l step 4: calculate the FMV of the employee’s personal use of the car which must be included in the employee’s income (annual lease value x percentage of personal miles driven). The AVLT can be found here: https:// ow.ly/5RpK50Q9MRA. Record keeping is key Finally, it’s important that employers and employees keep adequate records. The employee should log the business use of the vehicle for each trip including the date, business purpose of the trip and mileage. PayrollOrg (PAYO), https://ow.ly/ wLps50PNR1g, is the leader in global payroll education, publication and training. This nonprofit association conducts more than 300 payroll training conferences and seminars across the globe each year and publishes a complete library of resource texts and newsletters. Representing more than 19,000 members, PayrollOrg is the industry’s highly respected and collective voice in Washington, D.C. Get more information at https://ow.ly/aEcc50PNR4E and https://ow.ly/16WJ50PNR73.
l commuting valuation l annual lease value.
You have some flexibility in choosing the rule, to find the method best for the employee’s tax situation. The cent-per-mile rule Under the cents-per-mile rule, determine the value of a vehicle provided to the employee by multiplying the standard mileage rate ($0.655 for 2023) by the total miles the employee drives the vehicle for personal reasons. You can use this rule if you reasonably expect the vehicle to be regularly used in your business throughout the year or if the vehicle meets the mileage test. For the mileage test, the following must occur: l the vehicle is driven at least 10,000 miles during the year (includes business and personal mileage) l the vehicle is used during the year primarily by employees. If the company doesn’t provide fuel, you can reduce the rate by no more than 5.5 cents.
*This article relates to US payroll practices.
| Professional in Payroll, Pensions and Reward | December 2023 - January 2024 | Issue 96 36
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