Automobiles play an essential role in the day-to-day activities of many businesses. Whether a company vehicle is utilized for business travel or personal travel, employers should be aware of the tax considerations for each. Knowing what can be taken as a deduction and how to properly report personal use of a vehicle on an employee’s W-2 can help protect the company in the event of an IRS examination.
Business Use of Vehicle
Expenses directly connected to conducting a trade or business can be deducted if the business use is ordinary and necessary. Ordinary is defined as a normal, usual, and common within the line of business and necessary means the expense is helpful in conducting your business.
The most common and practical way to determine the expenses associated with the business use of a vehicle is by the standard mileage rate.
The standard mileage rate is a simplified method that a taxpayer can utilize unless one of the following apply:
- The taxpayer operates five or more vehicles at the same time.
- The taxpayer claimed a depreciation deduction using a method other than straight-line.
- The taxpayer claimed a Section 179 or bonus depreciation deduction.
- The taxpayer used the actual expense method for a leased car after 1997.
The total amount of miles driven and the miles related to business use will need to be documented to support the calculation for the standard mileage rate. Recording the dates and time of the miles driven each day in addition to the destination and business purpose will help substantiate the deduction if the company’s tax return is examined by the IRS.
In 2017, the standard mileage rate is 53.5 cents per mile. In addition, expenses for parking fees and tolls incurred during the year can be deducted as long as they are substantiated for business use.
If a company is unable to report expenses using the standard mileage rate, then the actual expense method should be used. As the name implies, this method is based on the actual expenses incurred during the year and requires more detailed records. The mileage is used to calculate a percentage of business use, which is then applied to the actual expenses incurred to calculate the deduction.
Personal Use of Vehicle
When an employer provides an employee with a vehicle, it is assumed that the vehicle will be driven for both business and personal purposes. Using a vehicle for personal, living, or family purposes is not considered a business-related expense. Commuting mileage or costs to travel to and from work are examples of personal vehicle use. There are three exceptions to this rule that qualify as a business expense:
- The mileage cost incurred for a person who travels between two or more workplaces each day.
- If a person is traveling to a temporary work location other than their regular workplace.
- If a person’s primary place of business is their home office, mileage to travel to another work location for the same business is deductible.
Personal use of a company car is considered a fringe benefit and the value of the benefit should be reported as wages on the employee’s W-2. To distinguish between personal and business use it is imperative for the employee to keep detailed records.
The rules related to company vehicles are complex and determining the various categories of expenses can be challenging.
Kreischer Miller can help you determine the proper tax reporting for your vehicles. Please give us a call to discuss your options.
Kate J. Stewart can be reached at firstname.lastname@example.org or 215.441.4600.
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