Policies on Business vs. Personal Auto Usage

Published:

by Marie Jett, CPA, Tax Manager

There are a few options that employers have available to them in order to account for vehicles used in business. The following methods and policies describe the options available to an employer.

Reimburse employees

For vehicles owned or leased by the employee, the employer can reimburse the employee for miles used for business purposes, which for 2011 is 51 cents per mile. Under this method, employees submit a mileage expense report detailing the miles driven, location driven to, date, and business purpose. Once expense report is submitted, employer will reimburse employee. As long as mileage reimbursement rate doesn’t exceed the IRS allowance (51 cents), the reimbursement is exempt from employee’s wages.

Employer-provided vehicles

The reporting methods available to a business vary depending on the personal use allowed by the employer. The first reporting method is used for simplified recordkeeping on the employee’s part. There are two policies an employer can establish and these policies state when and how much an employee can use the vehicle for personal use.

The first policy an employer can adopt will only allow the employee to use the car for de minimis, or minimal, personal use. This policy requires a written statement stating the vehicle cannot be used for personal use, unless it’s de minims in nature, to the employees and also requires the vehicle to be kept on the employer’s premises during nonbusiness hours. Under this policy, nothing is required to be added to the employee’s wages.

A second policy states that for personal purposes, the car can only be used for de minimis or commuting purposes. This policy also requires a written statement which must be provided to employees. For this policy to be applicable, the employee must be required to commute to and/or from work in the vehicle for a bona fide noncompensatory business reason – i.e. the employer requires the employee to commute to/from work in the vehicle. The employee cannot be an officer, director, or owner of a greater than 1% interest. Under this method, the employer will account for the commuting miles by including an additional $1.50 per one-way commute on the employee’s W-2.

For both of the policies listed above, the employer must reasonably believe the vehicle is not being used for any personal use beyond de minimis or commuting purposes, depending on the policy used. Also, both policies will require supporting evidence that policies are being adhered to and requirements met should the IRS audit the business. To help substantiate that requirements are met, a mileage log should be kept by the employee showing miles driven, location driven to, date, business purpose and total miles for the year. Should the employee not adhere to the policies above or the requirements cannot be substantiated, the employee will need to include the personal use as taxable income.

The second method an employer can adopt is to have the employee to keep record of the personal and business use of the automobile. If business use cannot be substantiated, the use will be considered personal and taxed to the employee. At the end of the year, the business miles and personal miles are determined and a percentage of business to personal mileage is calculated. The personal mileage percentage is then multiplied times the fair market value of the vehicle to get the personal usage value, which is taxed to the employee on his/her W-2 with the appropriate taxes being withheld.

A third method would require no mileage substantiation by the employer or the employee. Under this method 100% of the value is included as taxable income to the employee, included on the employee’s W-2 and taxes withheld.

Personal miles

Personal miles will include commuting miles. Commuting miles would be miles driven from the employee’s residence to the established place of business or employment. These miles are considered nondeductible personal miles. If the employee makes a business related stop before or after reaching the place of employment, these miles could be deductible. For deductibility in certain instances, see chart below.

Home to office

Nondeductible

Office to business related stops

Deductible

Home to 1st business related stop

Nondeductible

1st business stop to 2nd business stop

Deductible

2nd business stop to home

Nondeductible

If, home to office is 20 miles, and employee drives from home to 1st business stop to 2nd business stop to home, which is 30 miles, then the 10 miles in excess of commuting miles are Deductible.

The rules above do not apply to certain vehicles in certain instances. For example, these rules do not apply to a qualified nonpersonal use vehicle. An example of a qualified nonpersonal use vehicle is a delivery truck with seating for just the driver or the driver and a folding jump seat. Another example of a qualified nonpersonal use vehicle is any vehicle designed to carry cargo with a loaded gross vehicle weight greater than 14,000 pounds.