By Andrew Butts, Senior Accountant
On the road: A look at the tax implications for company cars
A company car can be a valuable perk for business owners, salespeople, and other employees, and 2021 may be an ideal time to invest in business vehicles. The Tax Cuts and Jobs Act of 2017 (TCJA) more than tripled the luxury auto threshold, from $15,800 to an inflation-adjusted $50,000. For 2021, the dollar cap on depreciation deductions doesn’t kick in until a vehicle’s cost exceeds $51,100. However, if your vehicle is considered a heavy vehicle, there are no limits.
Methods of valuing personal use
If your business provides company cars as a fringe benefit, you must include the fair market value (FMV) of employees’ personal use of these vehicles in their wages for income and payroll tax purposes. (You can still deduct your full cost as a business expense.)
According to the IRS, the FMV of personal use is “the amount the employee would have to pay a third party to lease the same or similar vehicle on the same or comparable terms in the geographic area where the employee uses the vehicle.” It also provides three alternative valuation methods that can simplify the process:
1. Cents-per-mile method. Under this method, you multiply a standard mileage rate (56 cents for 2021) by the total number of miles an employee drives an eligible vehicle for personal use. The standard rate includes the value of fuel you provide for miles driven in the United States, Canada and Mexico. If you don’t provide fuel, you may reduce the rate by up to 5.5 cents. Special rules apply for fuel provided outside the United States, Canada and Mexico.
You can use this method if 1) you reasonably expect the vehicle to be regularly used in your trade or business, or 2) the vehicle meets certain minimum mileage requirements. A vehicle is used regularly in your business if at least 50% of its mileage is business-related or if it’s used daily to drive at least three employees to and from work as part of a company-sponsored commuting pool.
2. Commuting method. This method allows you to value personal use of a vehicle at $1.50 per one-way commute (from home to work or from work to home). It’s available only if you have a written policy that limits personal use to commuting or minimal personal activities (such as running an errand on the way home from work), and you don’t use the method for “control” employees. Control employees include certain owners, directors and highly compensated employees. Other rules and restrictions apply; ask your tax professional for details.
3. Annual lease value method. Under this method, the vehicle’s FMV is converted into an annual lease value (using an IRS table). That amount is then multiplied by the percentage of total miles driven for personal purposes to estimate the value of the employee’s personal use.
A fleet-average-value rule allows employers with a fleet of 20 or more automobiles to take the average FMV for all automobiles in the fleet and apply the resulting annual lease value to each eligible vehicle.
Effects of the TCJA
The simple cents-per-mile and fleet-average-value methods weren’t available for vehicles whose FMV exceeds certain thresholds. For example, in 2017, the cents-per-mile method’s maximum FMV was $15,900 for passenger cars and $17,800 for trucks and vans. That same year, the fleet-average-value method’s limit was $21,100 for passenger cars and $23,300 for trucks and vans.
To align these thresholds with the TCJA’s new luxury auto threshold, the IRS adopted regulations that will increase the threshold to an inflation-adjusted $50,000 ($51,100 for 2021) across the board. This change will allow many more employers to use the cents-per-mile and fleet-average-value methods.
If you provide company cars for employees, contact VonLehman’s advisors to determine the optimal method for computing the value of personal use for income inclusion purposes. In light of recent rule changes, consider whether your company would benefit from switching to a different valuation method. Contact VonLehman today at email@example.com or 800.887.0437.