Don’t Let the IRS Drive Away With Your Tax Deduction! What You Need to Know About Business Vehicles

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Most companies utilize vehicles in their businesses; however, not all of them maintain the appropriate level of tax documentation to support their use as a business vehicle. Here is an overview of the necessary information you should be aware of when deducting costs related to a business vehicle.

Let’s start with the basic definition of a business vehicle, which the IRS defines as cars, SUVs, and pickup trucks that are used for business activities. The key phrase in this definition is “used for business,” which requires companies to address instances of both business and personal use of a vehicle.

When an employee uses a company-owned vehicle solely for business purposes, such use is characterized as a working condition fringe benefit which is non-taxable to the employee. However, if the employee uses the vehicle for both business and personal purposes, the value of the personal use is considered a taxable noncash fringe benefit and should be included in the employee’s W-2 income.

My clients frequently ask if there is an acceptable standard personal use amount or formula that can be used in lieu of maintaining the required documentation. Unfortunately, my answer to this question is always no! Each business is unique and therefore requires some level of analysis to determine each employee’s personal use of the vehicle.

In determining an employee’s non-business related activities, review their usage of the vehicle for commuting to and from work, personal errands, and vacations or weekends. Ideally, this information should be maintained and provided by the employee. You will need this information in order to calculate the taxable fringe benefit amount using one of four prescribed IRS methods.

Over the years, business vehicle use has been raised often during IRS examinations. Historically, taxpayers have done a poor job of tracking personal usage and maintaining the proper documentation, which creates a red flag for IRS examiners. In order to help reduce IRS audit exposure in this area, it’s a good idea to create a written automobile usage policy outlining the provisions for personal use as well as the documentation employees are required to maintain when using a company-owned vehicle. This policy should include at least an annual personal use calculation to determine the employee’s taxable fringe benefit amount.

Not having the proper documentation in place can have some detrimental consequences for your business and your employees. In addition to a potential limitation on the deductibility of vehicle expenses, it could also limit your company’s depreciation deduction on vehicles being utilized less than 50 percent for business purposes. Furthermore, it may create taxable compensation for employees if your company is not including any personal use in their W-2s. Please keep in mind that if you can’t determine business versus personal use, the value of the vehicle would be 100 percent taxable to the employee for both types of usage.

The tax implications of providing vehicles to employees for business use is a frequent topic of conversations with our clients. The rules can be confusing, and missteps can result in negative consequences. If you’d like to discuss your company’s business vehicle use and whether you have the proper documentation and policies in place, please reach out to a member of Kreischer Miller’s Tax Strategies group.

 

 

 

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