If employees need to drive often to perform their jobs, businesses can either provide their staff with a company vehicle or have employees use their own personal cars for work. While offering company cars may seem like a good investment, there are tax considerations to keep in mind.
What is a company vehicle?
Typically, a work vehicle refers to a car, truck, van, or SUV that is used by a company to carry out its business operations. Dump trucks and other vehicles which are used as equipment, do not qualify as business vehicles. Nor do vehicles that are used for a temporary task, such as airport transport vans or taxi cabs.
Business use vs. personal use of company vehicles
Business Use Company Car
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.
Personal Use Company Car
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 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.
Therefore, whoever is driving a company car must keep accurate mileage records which show business use of the vehicle, separated from personal use. These records must detail the business purpose of the drive, date, and number of miles driven.
Company vehicle policy for tax purposes
Many businesses use a company car policy which gives employees an auto allowance to reimburse them for the expenses of driving a company car 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 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 mileage driven and other related expenses such as parking, tolls, and fuel, and the employee must return any excess reimbursements to the company within a reasonable amount of time.
The vehicle allowance you offer your employees can be determined using either the IRS standard mileage rate or actual expense method. The standard mileage rate for the 2019 tax year is 58 per mile. Businesses can choose which method to use based on vehicle operation costs in their region and which option would give your business the larger deduction.
If a company does not have such a policy in place, any car allowance or reimbursement would be taxable to the employee, and the company must include the reimbursement amounts in the employee's income and withhold taxes accordingly.
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.
Additionally, the value of the company car used for employees' personal driving time must be included in their income and tax withholdings apply. For instance, if the monthly lease payment for the company car is $400, and Employee A uses the vehicle for 50 percent work and 50 percent personal driving, then you must include $200 a month in Employee A's paycheck as part of her taxable income.
Company cars vs. employees using their personal vehicles for work
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.
Keeping Mileage Records for your Company Car
Whether employees are driving a company car or driving their own personal vehicle, if it's for business reasons, employees must to 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 and least time-consuming 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 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.