Completion of year end payroll tax returns, including preparation of Forms W-2, is just around the corner. The taxability of employer provided automobiles must be taken into consideration when computing taxable wages of an employee.
Not-for-profit Organizations often have a vehicle available for employees or have vehicles that are normally used for charitable activities. The use of these vehicles by employees should be monitored and policies in place regarding personal use. The taxation rules are simple, if an employee uses the Organization’s vehicle it is taxable unless substantiated business use is documented. This, of course, does not apply if the vehicle is used only for business purposes, during regular business hours.
Substantiation can be obtained in three ways:
1. Employees must maintain adequate written records and provide written receipts. This is normally through mileage logs and mileage reports.
2. Safe Harbor Policies which include prohibition of all personal use, all use is personal use, all use but commuting is personal use or the vehicle is used in farming.
3. The vehicle is a special-purpose vehicle not normally used for personal use. (tow trucks, moving vans, police cars)
If the employee uses the vehicle for personal use, the value of that use is taxable. This value is subject to normal compensation taxation rules. There are three valuation methods:
1. Annual lease value, which is based on I.R.S. established auto lease value tables,
2. Commuting value, which can be used in limited circumstances and is based on a $3 per round-trip personal commute. The special requirements under I.R.S. Reg. 1.61-21(f) must be applied. Be sure to check this Regulation before using this method.
3. Cents-per-mile method, which generally is used when the vehicle will be used regularly for business and its fair-market value is less than $15,300 for cars and $16,000 for light trucks and vans.
The rules regarding the taxability of this fringe benefit can be complex. If you have any questions on this, the I.R.S. website offers some excellent guidance.
Kathy E. Hostetler, CPA