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A Year-End Evaluation of Personal Use of Company Vehicles

December 21, 2022 3 Min Read Tax Strategy, Business Tax, Individual Tax
Brian D. Kitchen, CPA, MT
Brian D. Kitchen, CPA, MT Director, Tax Strategies

As businesses approach year-end, many evaluate the need to report the personal use of company (PUC) vehicles for year-end tax reporting. A company-owned vehicle used for business purposes is not considered taxable income as long as it is properly documented. However, the ability for an employee to use the company-owned car for personal use does create a taxable fringe benefit. Personal use can include commuting time, using the car on the weekends, or making the car available for use by someone other than the employee.

Below are five methodologies the IRS allows businesses to use when calculating the taxable component of the personal use of a company-owned car.

  1. General Valuation Rule. This rule involves determining the vehicle’s fair market value (FMV), defined as the amount an employee would have to pay a third party to lease the same or a similar vehicle with the same or comparable lease terms in the geographic area where the employee uses the vehicle.
  2. Cents-Per-Mile Rule. Under this rule, employers use the standard mileage rate—$0.585 through June 30, 2022 and $0.625 from July 1, 2022 through December 31, 2022 — multiplied by the total number of miles the employee drives the vehicle for personal purposes.
  3. Automobile Annual Lease Valuation Rule. With this method, employers multiply the annual lease value of the vehicle by the employee’s personal miles as a percentage of total miles driven. This amount is also subject to a fuel adjustment. For this rule, the definition of automobile includes trucks and vans, as specified by an IRS table in Publication 15-B, which bases annual lease value on an automobile’s fair market value.
  4. Commuting Valuation Rule. This rule involves measuring an employee’s total commute distance to and from work, then multiplying it by $1.50. There are strict requirements to qualify for this method, including having a written policy that limits an employee’s use to commuting and de minimis personal use.
  5. Fleet-Average Value Rule. This applies to employers operating a fleet of 20 or more qualifying automobiles, and permits the usage of an average annual lease value for each qualifying vehicle in the fleet when applying the automobile annual lease valuation rule.

The fleet-average value rule and the simple cents-per-mile rule aren’t available if the FMV of the vehicle exceeds a certain base value, adjusted annually for inflation, on the first date the vehicle is made available to the employee for personal use. For 2022, this value is $56,100.

Once the PUC is calculated, the employer is required to adjust the year-end payroll to ensure inclusion in the employee’s taxable income as well as ensuring proper reporting on the end-of-year payroll tax forms.

Employers should evaluate their current policies to confirm proper documentation and substantiation and ensure the calculations are consistent and in line with the written plan.

Brian D. Kitchen can be reached at Email or 215.441.4600.

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Brian D. Kitchen, CPA, MT

Brian D. Kitchen, CPA, MT

Director, Tax Strategies

Business Tax Specialist, Individual Tax Specialist

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