Every business, from small mom-and-pop shops to large multistate corporations, use automobiles in their daily operations. It is a valuable benefit for both employers and employees. Employers receive an ordinary expense for having a company car and in certain situations, the expense is not included in the employee’s income. Sounds like a win-win! There have been recent tax law changes, under the Tax Cut and Jobs Act, and new IRS rules that make the perk even more valuable. Fringe benefits are an "add-on" form of employee compensation that can be offered in addition to a wage or salary. They can help attract great talent in a very competitive market. There are two ways to set up a company’s auto “fringe benefits;” a mileage reimbursement or a car allowance. There are pros and cons to both methods. Let’s look at them in more detail.
A company can provide workers a mileage reimbursement using the IRS standard rate or based on actual expenses. The IRS standard mileage deduction will be 58 cents per mile starting January 1, 2019. For actual expenses, employees would need to provide the receipts for all automobile related expenses, including gas, oil, tolls, repairs, insurance, etc. The amounts must be prorated to include only the business use of the vehicle. Reimbursement is a nontaxable benefit to the worker, as long as it is provided under the accountable plan. These rules are set by the IRS to ensure employees are being properly reimbursed for their business expenses. Three rules of the accountable plan are:
· The expenses must be for business driving only
· The employee must give the employer complete and detailed expense reports within a reasonable time (no more than 60 days from the time of the expense)
· The employee must return excess reimbursements to the employer. If the expenses are not returned within a reasonable time (120 days), the amounts are treated as paid under a nonaccountable plan and are then taxable
Mileage reimbursement is a fair way to incentivize team members who are driving more, and the employer is not wasting money by paying for expenses that didn’t occur.
Alternatively, the company can provide a car allowance for a time period (usually a month). It is very easy to handle and set up and there is no paperwork to be completed monthly. However, that comes with a cost. Under the new tax law, the car allowance is now included in taxable wages. The employer is required to pay its portion of Social Security and Medicare taxes on the car allowance, meaning the employee is not getting the full amount at the end of the day. The employee is already required to pay taxes on the car, which can be 30 to 40% (between Federal and State taxes) of the total payment.
The method to determine the amount to set up as a car allowance can also be difficult. It is unlikely that two employees are going to drive the exact same mileage in a year. Employers are then faced with the challenge of potentially over or under paying one of them.
Buying vehicle personally or using a company car
If you are a business owner and considering buying a new car, should you buy it personally or should the business purchase it? In this situation, there are a few things to consider.
If the business purchases the car, it will be treated as any other business asset, subject to depreciation deduction restrictions. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the business finances the vehicle, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to business-interest limitation under the tax code).
Let’s say you are using the vehicle 50% for business and 50% for your personal needs. The total cost for the car would be the tax you have to pay on 50% of the mileage driven for the year (taxable fringe benefit). If the automobile was purchased personally, you would have to pay the full price out of the pocket and would not have any deductions on your tax return. The Tax Jobs and Cuts Act repealed the deductibility of unreimbursed employee business expenses from 2018 to 2025.
There are several items to consider when determining the best method for employee use of Company’s authomobiles. This is just a brief overview. Have any questions? Ask your tax advisor for more information.