When deciding how to provide vehicle options to employees who drive for work, a company fleet or a car allowance are two of the most common options.
In a recent survey done by Everlance, 68% of companies using a vehicle program used a car allowance for at least some employees, while another 47% provided company cars for at least some employees.
But while these options may be common and relatively straightforward to establish and implement, are they the best programs for your company? In this article, we’ll walk you through everything to consider with company cars, company car tax implications, how to provide a tax-free car allowance for employees and more.
Typically, a company vehicle includes any vehicle—a car, truck, van or SUV—that is used by a company to complete business operations. Heavy machinery and equipment, such as forklifts or dump trucks, are not considered business vehicles. In most cases, business vehicles are used regularly by employees.
While providing a company car to employees who drive regularly for work can seem “easy” (just purchase the cars and give them to employees), there’s a lot more that is required to maintain a fleet and keep it IRS-compliant. For example, you’ll have to consider:
So, is a company car worth it for your employees? Keep reading for details on everything you need to consider about company cars.
Owning and maintaining a company fleet has a variety of tax implications (and benefits). There are two main things you need to know about company car taxes.
If employees use cars for personal use as well—running errands during their lunch breaks, driving to and from home and the work site with a company car—this personal use is not tax-deductible and needs to be recorded and removed from the mileage you’re deducting. Employee commutes—regardless of whether they happen with a company car or a personal vehicle—are not tax-deductible.
This includes any portion of those expenses that are related to personal use. For example, if an employee uses the car 15% of the time for personal use, you’re still allowed to deduct 100% of the maintenance on the vehicle from taxes.
Additionally, if your company finances or leases your company fleet, the interest expense on that loan is considered a deductible business expense.
Whether it is the business owner or employee driving a company business car, only business use of that vehicle is a deductible business expense. While most employee benefits are taxable to the employee, the use of a company vehicle is not. This is because it's considered a working condition benefit, which the IRS defines as "property and services you provide to an employee so that the employee can perform his or her job."
Therefore, the business use of a company car is considered a business expense and not taxable to the employee.
On the other hand, personal use of company vehicles is not deductible, including commuting to work. This means if a business owner or employee is driving from their home to their regular place of business, even if they are driving in a work vehicle, that mileage is not tax deductible.
Personal use of a company car is generally considered under this policy as a non-cash fringe benefit. As with any benefit given to employees, companies must consider the benefit's value and report it as part of the employee's pay, as well as withhold taxes from the value amount, unless the employee reimburses the company for personal use of the vehicle.
As a result, whoever is driving a company car must keep accurate mileage records that show business and personal use of the vehicle. These records must detail the business purpose of the drive, date, and number of miles driven. The easiest way to track mileage and keep these records IRS-compliant is to use an automatic mileage tracking app like Everlance. This way, records are kept automatically and drivers simply have to ensure the app is on in the background as they drive.
Most companies will pay for gas in a company car, as it’s part of the cost of owning and operating the vehicle (and it can be tax-deductible for the company!) You can achieve this by either providing a fuel card in the vehicle, or by reimbursing employees for gas purchased.
Many businesses use a company car policy which gives employees an auto allowance to reimburse them for any out-of-pocket expenses of driving a company vehicle for business purposes. A car allowance is not considered a taxable benefit to the employee, as long as it's given through an accountable plan your business has in place to account for the money given to the employee. The IRS wants to assure that this is not an employee benefit, but rather a legitimate business expense paid by the employee and reimbursed by the company.
To show this, your employees must provide detailed records showing business use of the company vehicle, such as:
In addition, the employee must return any excess reimbursements to the company within a reasonable amount of time.
If you give your employees the use of a company car and don't reimburse them for driving expenses, the employee can't deduct those expenses on their personal tax return. This is because the Tax Cuts and Jobs Act, which went into effect for the 2018 tax year and beyond, no longer allows employees to deduct business car expenses that aren't reimbursed by their employer.
Although sometimes the term “car allowance” is used interchangeably for a variety of vehicle programs, a car allowance technically refers to the method of providing a flat rate “allowance” for employees each month to cover their expenses.
A car allowance program doesn’t require mileage or expense tracking, but rather is calculated once and then that fixed sum is given to employees at regular intervals to cover expenses. Instead of a company car, employees drive personal vehicles and are provided a reimbursement.
If you’re providing a fixed sum to all employees—for example, if all employees receive $600 a month for driving-related expenses—this is generally considered compensation and therefore is taxable, both to the employee and to the organization.
Since a monthly allowance is considered a form of compensation similar to a salary, it falls subject to payroll and income tax. This waste means your employees end up taking home much less money than what their actual allowance is.
For example, for a driver receiving $600 per month, as much as 40% can be lost to taxes. So if you want to make an allowance program work for your company, we suggest adding a 30% cushion to account for both the taxes you and your employees will have to pay.
While these programs seem straightforward, they’re often costlier than imagined due to the tax waste they create.
As with most things, there are pros and cons to providing car allowances to your employees. While it can be a good fit for some groups, it’s not the best option across the board.
Car allowances are best for:
Each program can have its benefits for specific situations.
Company cars are best for high mileage drivers and delivery drivers, for whom reimbursing for mileage would be a significant expense for the company, and who spend the majority (or all) of their workday in the car.
Car allowances are best for leadership teams.
Many organizations like home health care, sales, and any company with employees out in the field find it more cost-effective to have employees use their own personal cars for business purposes, instead of providing use of a company car. This option reduces upfront costs for the business and the employee, offers less tax reporting requirements, and decreases the company's liability for providing company vehicles.
However, most organizations find that a flat-rate car allowance creates more tax waste than necessary, and doesn’t reimburse employees fairly. As a result, many companies turn to mileage-based reimbursement programs instead. These options eliminate tax waste (as they are considered tax-free by the IRS, if compliant records are kept) and reimburse employees for actual expenses.
Whether employees are driving a company car or driving their own personal vehicle, if it's for business reasons, employees must keep accurate records and provide their company with detailed reports.
For tax and employee reimbursement purposes, business use of a company car or employee's own vehicle must be separated from personal use of the car.
The easiest way to track business mileage is by using a mileage tracking app like Everlance. This app allows drivers to distinguish between business and personal drives by merely swiping left or right at the start or end of each trip. Mileage driven is then automatically recorded, stored in the cloud, and can be downloaded into IRS-compliant reports.
Offering employees a company car for business driving may seem like a good investment. However, having your employees use a mileage tracking app—with a company vehicle or their personal car—is an even better investment to consider.