Understanding Personal Use of a Company Vehicle

A company-owned vehicle used for business purposes (if it is documented) is not considered taxable income. However, when your employee uses the company car for personal use, it becomes taxable and must be reported on their W-2.

What Does “Personal Use of Company Vehicle” Mean?

Personal use of a company vehicle for non-work-related purposes is a taxable perk known as a de minimis fringe benefit. Examples of driving a company vehicle for personal use include:

• Your employee’s commute between home and work, if it is on a regular basis.
• Trips unrelated to your organization’s purpose, work, trade, etc.
• Use on a vacation or on the weekend.
• Use by someone other than an employee of your company.

Infrequent personal usage of a company vehicle is typically deducted from an employee’s salary.

How Do I Account for the Personal Use of a Company Vehicle?

The value of personal use of a company vehicle must be reported as income at least once a year. There are four methods for how you report use of a company vehicle for personal use:

General Valuation Method

The general valuation method for personal use of a company car is determined by the cost an individual would incur to lease the same vehicle under the same terms in the same geographic area.

Annual Lease Value Method

To use the lease value rule, multiply the annual lease value of the car (via the IRS Annual Lease Value table) by the percentage of personal mileage driven. This will give you the Fair Market Value (FMV) of the employee’s personal use of a company-provided vehicle.

As a note, the amount determined from the table includes the value of maintenance and insurance for the vehicle, but not the value of employer-provided fuel. Federal tax laws stipulate that employer-provided fuel must be valued separately.

Cents-Per-Mile Method

Using this method, the FMV is determined by multiplying the IRS standard business mileage rate by the number of personal miles driven.

Two conditions must be met for you to use this method:

• The vehicle must be driven at least 10,000 miles annually.
• The maximum FMV of a vehicle for use with this method is $60,800.

The IRS Business Mileage Reimbursement Rate is 65.5 cents per mile as of July 1, 2023.

The 2024 rates will be released in December.

Commuting Value Method

With the commuting valuation rule, the value is calculated by multiplying the number of trips by either $1.50 (one way) or $3 (round trip). However, there are several conditions that must be met to use this method:

• The vehicle is owned or leased by you and provided to your employee for use in conjunction with your business.
• You require your employee to commute to and/or from work.
• You have a written policy prohibiting your employee (and their family) from driving the vehicle for personal use other than commuting to and from work. Further, you enforce this company vehicle personal use policy.
• Is a corporate officer earning at least $120,000 or more
• Is a director
• Earned at least $130,000 or more
• Owns 1% or more equity, capital or profits interest in the business
• An elected official

How Do I Calculate Personal Use of a Company Vehicle?

Here are a few more helpful tips when you are determining which method to use to calculate the use of a personal vehicle according to company car tax rules:

• If you use the cents-per-mile or annual lease valuation method, the company car taxation rules dictate that you must use it for all subsequent years you provide a vehicle to an employee. So carefully consider which type of compensation management method you will want your records to be based on before committing.
• The same special valuation method does not have to be used for all company-provided vehicles or for all employees comprising your team.
• If you have one company-provided vehicle that is used by multiple employees, you must use the same valuation method for all employees using that vehicle.

How Do I Report Personal Use of Company Vehicle for Year-End Tax Planning?

Employee personal use of a company vehicle is reported on Form W-2 in boxes 1, 3, 5 and 14 and on Form 941 on line 2, 5a and 5c. You also need to watch if your state reports these wages in box 16.

Why is Calculating Personal Use of Company Vehicle Important?

The personal use of a company-owned automobile is considered part of an employee’s fully taxable wage income and proper documentation is vital. If you cannot determine business versus personal use, the value of the vehicle would be 100% taxable to the employee for both types of usage. It is important to get this reporting accurate, so your employee’s taxes (and yours) are correct come year-end planning time. Generally, it’s a good idea to consult with a certified accountant to ensure you utilize the best practices and that all the required forms are included when declaring taxes.