A company car can be a valuable perk for business owners, salespeople and other key employees who use their vehicles for business purposes. Now may be an ideal time to acquire business vehicles, as the Tax Cuts and Jobs Act of 2017 (TCJA) more than tripled the “luxury auto” threshold, from an original cost of $15,800 to an inflation-adjusted cost of just over $50,000. Depreciation deductions for 2019 are not limited until a vehicle’s cost exceeds $50,400, and accelerated depreciation opportunities are available.
Methods of valuing personal use
If you provide company cars as a fringe benefit, you must include the fair market value (FMV) of each employee’s personal use of these vehicles in their wages for income and payroll tax purposes. You, however, can still deduct your full cost as a business expense.
According to the IRS, the gross FMV 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.”
Personal use is computed as a percent, based on personal mileage to total miles incurred on the car each year. Note that the employee commuting from home to and from your single office is generally considered personal use. Examples of business use would be visiting customers and vendors, sales and prospecting calls and traveling to training or research initiatives. The law requires that employees substantiate business and personal use with adequate contemporaneous records.
The IRS provides three alternative valuation methods that can simplify the process:
- Cents-Per-Mile Method
Under this method, you multiply a standard mileage rate (58 cents for 2019) by the total number of miles an employee drives an employer-provided vehicle for personal use. The standard rate includes the value of fuel you provide. If you do not provide fuel, you may reduce the rate by up to 5.5 cents.
You can use this method if you reasonably expect the vehicle to be regularly used in your trade or business or 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 is used daily to drive at least three employees to and from work as part of a company-sponsored commuting pool.
- 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 is available only if you have a written and enforced policy that limits personal use to commuting or minimal personal activities (such as running an errand on the way home from work). You use this method for “control” employees, which include certain owners, directors and highly compensated employees. Other rules and restrictions apply as well.
- Annual Lease Value Method
Under this method, the vehicle’s FMV is converted into an annual lease value (using a table published annually by the IRS). That value amount is then multiplied by the percentage of total miles driven that were 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 were not previously available for vehicles whose FMV exceeded 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 and the fleet-average-value method’s limit was $21,100 for passenger cars and $23,300 for trucks and vans. Previous depreciation rules also limited the deductions for depreciation over the first five years to approximately $15,000 for passenger cars and $16,800 for trucks and vans.
To align with the TCJA’s new luxury auto thresholds, the IRS recently proposed regulations that will increase the threshold to an inflation-adjusted $50,000 across the board. This change will allow many more employers to use the cents-per-mile and fleet-average-value methods. Furthermore, with TCJA’s revised depreciation rules, many companies will be able to depreciate the full cost of these vehicles within four to five years.
Review your options
Companies still must consider the overall costs of vehicle ownership and liability concerns of vehicles provided to employees. In light of recent tax law changes, though, consider whether your company could benefit from providing vehicles to employees and the optimal method for computing the value of personal use for income inclusion purposes.
For more information, contact Joel Herman at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.