IRS Fringe Benefits: Personal Use of Company Car

The personal use of your company car is considered a "benefit in kind" and must be added by your employer to your gross salary so that you pay income tax on this benefit.

The IRS lists several ways to determine the value of the personal use of a company car in Publication 15-B: Employer's Tax Guide to Fringe Benefits:

The General Valuation Rule

This is the most common and recommended method to determine the value of the "benefit in kind" given to the employee for using the company car for personal purposes. Under this rule, the value of the benefit is the Fair Market Value (FMV) of the vehicle. The the FMV of an employer-provided vehicle 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.

Example:

The employer provides the employee a brand new Kia Sportage. This vehicle model can be leased for $359/mo under a 36-month contract. This operational lease covers the cost of the vehicle plus insurance, registration and taxes.

The employee uses a mileage logbook (such as Psngr) to determine the percentage of miles used for personal and business purposes. After a month, the mileage report shows 122.4 personal miles (18%) vs. 557.6 business miles (82%). The value of the fringe benefit for this month is therefore:

$359 * 18% = $64.62

Cents Per Mile

Under this rule, you determine the value of a vehicle you provide to an employee for personal use by multiplying the standard mileage rate by the total miles the employee drives the vehicle for personal purposes.

In order to use the cents-per-mile rule, the vehicle must meet the following conditions:

• The vehicle is actually driven at least 10,000 miles during a full calendar year.
• The vehicle is used primarily by employees, and not, for instance, their family members.
• The value of the vehicle, when made available to employee, is less than $60,800 for the calendar year 2023. This maximum value is updated by IRS every year, so check IRS Publication 15-B.

The Commuting Rule

This rule determines the value of the personal use by assuming all personal use is for commuting, hence multiplying each one-way commute by $1.50.

This rule is not commonly used, because it is very restrictive. The rule can only be used if:

• The employee does not use the vehicle privately other than commuting to and from work.
• No other driver is using the vehicle, other than company employees. This has to be established by a written company policy which the employee must adhere to.
• The vehicle is not used by a control employee.

Lease Value Rule

For a leased company car, the fringe benfit value is determined based on the Annual Lease Value, as published by the IRS. You then multiply the annual lease value by the percentage of personal miles out of total miles driven by the employee. When the benefit is calculated on a monthly basis, it is pro-rated accordingly.

We can use the example above to illustrate the calculation of the fringe benefit based on the "lease value rule":

The employer purchases a new company car for $56,950, to be provided to the employee. The Annual Lease Value of the vehicle is $14,750. The employee drove 122.4 personal miles (18%) vs. 557.6 business miles (82%) last month. This is based on a mileage tracker, which the employee is required to keep in this case. The value of the fringe benefit will then be:

$221.25

This value must be added to the employee's wages and taxed accordingly.

If you start using the "Lease Value Rule" for a given company car, you must continue to use this rule for all later years in which you make the vehicle available to any employee.