Weighing Options For Your Company Vehicles
When it comes to business travel there are several options a company should review when deciding what is best for the company and the employees. Not only should you consider costs and tax reporting, but also company image and the administrative burden. In this article, we will go through the available options along with a brief overview of each one so you can decide the best fit for your team.
The first option to consider is owning company cars and providing them to employees to use. This option means the company would cover the out-of-pocket cost to purchase the cars and then foot the bill for care and maintenance. Depending on how many company cars you’d need, you may be able to get fleet pricing to make them more affordable. In addition, these vehicles will need to be insured each year, and property taxes will also be an added expense. So where’s the benefit, you ask? Providing the perk of a company car may be a good recruiting tool to use when searching for new talent. In addition, this allows you to control the care and maintenance of a vehicle that reflects on your company image. If you have employees transporting vendors and customers around, you want these vehicles to reflect the care and prestige of the company.
Having a company car also allows you to put your company logo on the side, if additional marketing is appealing to you. The company would be able to deduct all of these expenses as ordinary and necessary, as well as depreciation on the vehicle. It would require additional payroll reporting and withholding as this benefit represents taxable income for the personal use value included in each employee’s W-2. Owning a company car also requires the employee to keep track of any personal use of the vehicle, if allowed by the company’s policies, which can be cumbersome. When considering costs, a company fuel card could provide for increased awareness and management of fuel usage, which may also help with forecasting and tracking.
On the accounting side, there are four valuation options to choose from for reporting taxable wages. These are the general valuation method, the annual lease value method, the cents-per-mile method, and the commuting rule. Below is a quick summary of each. This is something you would want to analyze and determine in advance, as there may be restrictions if you decide to change methods later down the road.
Annual Lease Value Method – To determine the fair market value, the annual lease value of the car on the first day available to the employee (per the IRS Annual Lease Value table) is multiplied by the percentage of personal miles driven. Record keeping of business versus personal miles is required by employees.
General Valuation Method – If the above valuation rules cannot be used, the value of this fringe benefit to be included in wages would be the annual amount an employee would have to pay a third party in an arm’s-length transaction to buy or lease the benefit.
Cents-Per-Mile Method – For this method, you must take the personal miles provided by the employee and multiply it by the standard mileage rate issued by the IRS (58.5 cents per mile for 2022). This amount is then included in the employee wages. There are some restrictions with this rule, including a requirement of more than 10,000 miles driven annually and more than 50% of the miles driven for business use.
Commuting Value Method – For this rule, a written policy must be in place to restrict personal use to only commuting and de minimis personal use. This method isn’t available to highly compensated or controlled employees per the IRS definitions. The IRS provides a $1.50 one-way commute fee to multiply times the number of one-way commutes for the year. This amount would be included in income for the employee.
Another option if you prefer not to own company vehicles is to provide car allowances to your employees. There are two options with this method: the flat rate method and the mileage reimbursement method.
Both methods have the employee pay for car care, maintenance, gas, etc., and the company would reimburse the employee a certain amount to help cover these costs. In addition, the agreement can be written for the company to allow the employee to use a company credit card for some of these costs.
The first option with company car allowances is to provide the employee with a flat fee to help cover costs. With this method you must be careful to avoid being unfair (i.e. providing different allowances for different employees with no substantiation). Different allowances are allowed, but this would be more applicable when you have employees in different economic areas of the country where fuel and maintenance costs could vary significantly. The employee must also include the allowance amount (plus any costs covered by the employer) in their income for the year. There is potential to exclude a portion of this from income if the employee keeps detail records on business versus personal use. Along with ease of accounting, another benefit of this method is the company doesn’t have any additional liability since the vehicle isn’t owned by the company.
If you prefer not to do a flat rate for each employee you can also choose the mileage reimbursement method. With this the employer pays each employee a certain rate per business mile. This rate is typically the IRS standard mileage rate which is published each year. For 2022, it is 58.5 cents per mile. This method does make forecasting and accounting analysis somewhat more difficult as it is harder to predict the cost from period to period. As far as wages go, this method is simple as it is considered a reimbursement and isn’t required to be included in income.
Overall, each method has its own pros and cons that must be reviewed to determine which option is the best fit for your company. When making your analysis be sure to contact your accounting professional for more detail on the bookkeeping and tax consequences of the different options.