Valuing Your Employee's Personal Use of Business Auto

Whether your company supplies business autos to employees as "perks" or as necessary tools to help them get their work done, their personal use of the auto has tax implications for them and for you. That's because an employee's personal use of a company auto must be treated as non-cash fringe benefit income that's subject to social security taxes. Fortunately, the tax rules give you some flexibility in valuing personal usage of the company car. You can choose from among four valuation methods:

l the general fair market value method, which is based on what a person would pay locally to lease a comparable auto for a period of time comparable to the period of time the employee has use of the car;

l the lease value method, which assigns an IRS-determined annual lease value to the auto depending on its value when first provided for the employee's personal use;

l the mileage rate method, which values each 1999 personal-use mile at 32.5 cents before April 1, 1999, and at 31 cents after March 31, 1999; or

l the $1.50 per one-way commute method.

The first two methods can be used for any auto and any employee. The mileage-rate method can be used only if the car's fair market value doesn't exceed an annually adjusted figure (last year's was $15,800), and is regularly used in your business, or is driven at least 10,000 miles during the year and used primarily by employees. The $1.50 commute method applies only to an auto used in your company's business, and only if the employee isn't highly paid, a company officer or director, or a more than 1% company owner.

Which of the first three methods results in the lowest personal use valuation and the lowest tax bill for employees? The answer will depend on factors such as the number of annual personal miles, value of the car, and the ratio of personal miles to total miles. We can help you through the maze of these rules, and also show you which of them will cause the least amount of paperwork. Please do not hesitate to call us for an evaluation.