Companies provide cars to employees for a variety of reasons, and often a company will find it easier to allow employees to keep the car with them at all times. When this happens, it is often assumed that the employee drives the car for non-work related reasons, too. Federal tax laws count company cars as a fringe benefit and an employee's personal use of the car is taxed differently than the business use of the car. The IRS provides companies and employees three ways to calculate a car benefit: the cents-per-mile rule, the commuting rule and the annual lease value.
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Calculate the miles driven for work purposes for the year. The cents-per-mile rule only applies to vehicles driven at least 10,000 miles per year and at least 50 per cent of those miles must be for work purposes. You must have documentation of all your business and personal mileage.
Check the value of the car against the IRS's maximum auto value for the cents-per-mile rule for the tax year. In 2009, car owners could not claim the cents-per-mile rule if the vehicle was worth more than £9,750 for cars and £9,880 for a truck or van, according to the IRS.
Multiply the number of personal miles driven by the current year's IRS mileage rate, which in 2010 was 30p. The amount covers vehicle maintenance and insurance, according to the IRS. The personal-miles total must be reimbursed to your employer or deducted from your pay.
Calculate the number of trips the employee took to work in a given year. The commuting rule determines the value of the benefit by multiplying each one-way trip by an amount determined by the IRS, which in 2010 was 90p.
Check the IRS policies to ensure that you can use this benefit. The commuting rule does not allow any personal use of the car.
Check the salary guidelines for the tax year for this benefit because it is targeted toward "highly compensated employees." For example, the IRS guidelines for 2010 ruled that board members claiming this benefit had to be paid higher than £126,750. For information on the other pay levels and types of employees defined for this benefit, see Resources.
Calculate the amount of money it would take to lease the vehicle from a third party by using a table provided by the IRS for each tax year. First, you must determine the Fair Market Value (FMV) of the company car, then scroll down the IRS list for that year to find out the lease rate.
Calculate the percentage of miles driven for business purposes and the percentage for personal use. Determine the amount of fuel purchased by the employee, if applicable.
Report the value of the employee's personal car use on the appropriate IRS form.
Tips and warnings
- Read the IRS guidelines and your company's policies thoroughly to choose the correct car-benefit calculation.
- Ask your company for a copy of a projected car-benefit calculation before accepting a position to ensure that personal use does not become a liability to you.
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