Should You Give an Employee a Company Car?
Giving an employee the use of a company car sounds like a good idea. But, as always, it's more complicated than it might seem, especially relating to taxes.
This article takes you through some of the issues related to employee drivers of company cars.
Only Business Use Is Deductible
No matter who is driving a car or who owns a car, only business use of that car is deductible as a business expense. Whoever drives the car must keep good at-the-time records of driving for business use.
The business event must be recorded the day it occurred, and it must include the details of the purpose, date, and location or mileage.
You Can Give Employees an Auto Allowance
Most businesses give employees an auto allowance to reimburse them for the expense of driving a car for business purposes. The allowance can be given in addition to providing the car to the employee.
This allowance is not a taxable benefit to the employee, as long as it's given through an accountable plan. An accountable plan is a set of procedures your business sets in place to adequately account for the money given to the employee. The IRS wants to make sure you are not giving employees benefits, but that these are legitimate business expenses paid by the employee and reimbursed by you.
You Must Use an IRS Accountable Plan
Basically, to have an accountable plan, the auto expenses must have a legitimate business purpose, the employee must provide you with adequate records showing business use and amounts spent, and the employee must return any excess reimbursements within a reasonable amount of time.
The auto allowance you give employees can be determined using either the standard IRS rate (different each year) or actual expenses. The method you use is up to you, with some limitations.
If you don't set up and use an accountable plan, any allowance or reimbursement you give employees for driving is taxable to them, and you must include the reimbursement amounts in their pay and withhold taxes.
Employee Use of a Car Is a Working Condition Benefit
A working condition benefit, according to the IRS, is "property and services you provide to an employee so that the employee can perform his or her job." This benefit is excluded from the employee's income on the assumption that the employee could take the deduction on a personal tax return. In the case of a company car. Remember, this is just the business use of the car that is (a) allowable as a business expense and (b) not taxable to the employee as a benefit.
But, employee use of the car for personal reasons is not deductible as a business expense, either to the employee or to your business. Here's how this works:
Personal Use of a Company Car Is a Taxable Benefit
Basically, anything you give employees is a taxable benefit. If you give an employee the use of a car, personal use by the employee is considered by the IRS to be a non-cash fringe benefit.
Intuit Payroll says, "A portion of the car's value is considered part of the employee's total compensation for tax purposes."You must consider the value of this benefit and show it on the employee's pay, and, of course, withhold federal and state taxes and FICA taxes (Social Security and Medicare taxes) from this amount, the same as from other pay and benefits.
Cars Are Listed Property of a Business
One final note: Business vehicles are in a special class of property for business tax purposes. They are considered listed property, which includes property that can be used both for business and personal reasons.
Whether or not you give the car to an employee or use it yourself, if the car is used less than 50% of the time for business purposes, you can still deduct the business use, but you have to use straight-line depreciation.
If You Decide to Give a Company Car to an Employee
Let's look at an example to see how all of how all of this works:
Your business leases a car and gives it to Mary to use for business driving.
Mary must keep good records on the split between business and personal use and provide your company with detailed reports. For this purpose, let's say she drives 50% for business and 50% for personal uses.
No matter who drives the car, the lease is in the company's name, so the lease payment is deductible as a business expense, but only to the extent that it's used for business purposes. (If the car is purchased, the depreciation on the car is deductible, again only for the business portion of its use.)
If you reimburse Mary for her business driving expenses, you don't have to consider this reimbursement taxable if you have an accountable plan, as described above.
But, the value of the car for the personal driving time must be included in Mary's income (and withholdings apply). If the monthly lease on the company car Mary drives is $500, you must include $250 a month in her paycheck.
Why It's Important to Keep Good Records on Business Use
As you can see from the above discussion, it's very important that the driver of the company car keep excellent records to prove the amount of business driving.
This proof is needed:
- So you can reimburse employee driving expenses and not have to include these in the employee's pay
- To prove business use so you don't have to include this portion of the car's value in employee pay,
- So you can deduct more depreciation expense, and
- So you can use more of the value of the car for your other business expenses.
More Information in IRS Publications
- IRS Publication 535 - Deducting Business Expenses
- IRS Publication 15-B - Employer's Tax Guide to Fringe Benefits
- IRS Publication 463 - Travel, Entertainment, Gift and Car Expenses
- IRS Tax Topic 510 - Business Use of a Car
Disclaimer: This article is for general information purposes only. It's not intended to be tax or legal advice. Check with your tax and financial advisors before you begin handing employees the keys to company cars.