September 30, 2011
Generally, the value of an employer-provided auto is a fringe benefit that must be included as compensation to the employee.
The exception to this rule is when an employee utilizes a vehicle that qualifies as a non-personal-use vehicle (QNV)–simply stated, a vehicle that is not likely to be used for personal purposes or is used minimally. Examples of QNVs are police, fire and public safety vehicles, vehicles with a gross vehicle weight over 14,000 lbs, delivery trucks, buses, tractors, cement mixers, etc.
If the employer-provided vehicle is not a QNV, then an amount should be calculated for the fair market value of personal use. This amount should be included in the employee wages and subject to income tax withholding and payroll taxes. The value is based on what it would cost to lease a similar vehicle for the same period the auto is available for personal use.
The IRS provides three methods of calculating this value:
- Annual Lease Value Method (ALVM)
- Commuting Value Method (CVM)
- Cents-per-Mile Method (CPMM)
The ALVM amounts are based on the vehicle’s fair market value on the first day that the vehicle is made available for personal use. See Auto Lease Value Table in IRS 2011 Publication 15-B on page 26 and see IRS 2011 Publication 15-B on page 27: http://www.irs.gov/pub/irs-pdf/p15b.pdf
If purchased in an arm’s length transaction, this is the cost of the vehicle. The FMV is redetermined every 5 years on January 1 of that year or sooner if the vehicle is transferred to another employee. If the vehicle is not used for a full year, the amounts are prorated based on the number of days the vehicle was available. If used for less than 30 days, there is a separate calculation.
The CVM values the employee’s personal use of the vehicle at $3.00 per round trip and $1.50 per one way commute. This method can be used in 5 circumstances: 1) if multiple employees car pool in the same vehicle, 2) the employee is required to commute, 3) personal use is prohibited by the employer, 4) no personal use occurs or 5) the employee is not a control employee. All of these limited requirements are provided given that any personal use would be very minimal if at all.
The CPMM can be used in 2 circumstances: 1) if the company vehicle is valued at less than $15,300 for a passenger auto and $16,200 for a truck or van and 2) the employer expects the car to be used regularly for business the entire year, or the vehicle must be used at least 10,000 miles during the year. This method should be used the first day an employee uses the vehicle for personal purposes. Once used, this method should be used as long as it meets the eligibility requirements above. The exception to this is if the vehicle later qualifies for the CVM, then the CVM can be used.
To accurately record business and personal use mileage and have a defendable position with the IRS should you ever be examined, one should keep a mileage log detailing total business and personal mileage and follow the 5-W rule to document the business purpose: When was the use, why and what was the purpose, where did you go, and who did you meet.
Lastly, as long as the personal use of the company vehicle is recorded and properly included in employee compensation, the company can recover the cost of the vehicle as 100% business use listed property on Form 4562.
Somerset can help calculate the personal use of auto add-back to wages if you need assistance–please contact us.