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Cars for EmployeesPlain English (navigation buttons at the end of the page) |
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Question or Topic |
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The Question: If the employer furnishes a car to an employee and allows the employee to drive the car home before and/or after work, must the employer report any of the benefit on the employee's W-2 (include the use in the wages or salary)? |
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The Answer |
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In most circumstances the employee must include in his or her income (pay the income taxes) on the value of automobiles or trucks furnished by employers that are driven home. If the employer charges the employee for the personal use of a vehicle, there is no deduction for the amount paid as there is deemed an agreement between the employee and the employer the charges were in fact for personal use. If the employee believes the charge for the personal use is not correct, then the employee should consider whether it would be advisable to confront the employer, continuing employment or seeking employment elsewhere. There is a very high probability the IRS would accept the reporting by the employer under the theory the employee has accepted the charge and thereby has consented to the reporting. The IRS will not place itself in between two parties when the disagreement appears to be that of a civil nature. If the employee were to keep detailed and verifiable records of the use of the employer's vehicle and prove the charges for the personal use were incorrect - it is unlikely the IRS would become involved because the issue involves that of the employee and the employer. If an employer furnishes a car to any employee the value of the personal use must be included on the W-2 for the employee. Several methods of valuation are enumerated in the Code. (Transportation because of unsafe conditions is one special category) This discussion includes the compliance issues and the computation issues. The reporting issue is that the W-2 must include the amount of the includible value of the personal use of the company vehicle. Special rules limit the amount that must be included in income for employer-provided transportation or for transportation provided because of unsafe conditions. These limits mean that a portion of the value of employer-provided transportation may be excludable from income.
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Solutions |
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Solutions are dependent upon facts & circumstances, law and the objectives. These elements vary from one time to another, from one circumstance to another and from person or entity to another. Kit to Prepare for Your Adviser
EMPLOYER-PROVIDED
TRANSPORTATION DUE TO UNSAFE CONDITIONS
The
regulations set a $1.50 per one-way commute limit on the amount that must
be included in income for employer-provided transportation furnished
because of unsafe conditions. Reg. Section 1.61-21(k). Thus, the value of
transportation received in excess of $1.50 may be excluded from gross
income. This limit applies only if four conditions are met:
In
satisfying the first of the criteria, unsafe conditions exist if a
reasonable person would, under the facts and circumstances, consider it
unsafe for the employee to walk or use public transportation at the time
of day the employee must commute. Reg. Section 1.61-21(k)(5). A
history of
crime in the geographic area surrounding the employee's workplace or
residence at the time of day the employee must commute is one factor that
indicates that it is unsafe. The regulations deal primarily with
transportation provided for employees who begin or end their workday during
the night or early morning. The
second and third criteria require the employer to establish a written
policy (e.g., in its personnel manual) under which the transportation is not
provided for the employee's personal purposes other than for commuting due
to unsafe conditions; and require that the employer's practice in fact
corresponds with the policy. The
fourth condition limits the benefit to qualified employees. A qualified
employee must be paid on an hourly basis, cannot be claimed as an
employee exempt from the minimum wage and maximum hour provisions of the
Fair Labor Standards Act (FLSA) and cannot be a highly compensated
employee. Reg. Section 1.61-21(k)(6)(i). If questions arise concerning the
classification of an employee under the FLSA, the pronouncements and
rulings of the administrator of the wage and hour division, Department of
Labor, is determinative. Reg. Section 1.61-21(k)(6)(iv).
EXAMPLE 3:
commute from home to work in her income. Reg. Section 1.61-21(k)(7),
(Example 1).
EXAMPLE 4: The facts are the same as in Example 3, except that the firm
has the car service drive
conclusion of her shift, even though public transportation would not be
considered unsafe by a reasonable person at that time.
include the full fair market value of the transportation in her gross
income. Reg. Section 1.61-21(k)(7), (Example (2).
EXAMPLE 5: Cindy is an associate for a law firm in a metropolitan area.
The normal working hours at the law firm are from
until
available for Cindy at the time she commutes from work to home during the
evening, is considered unsafe. In response, the law firm hires a
car service to take Cindy home each evening. Cindy is not a "highly
compensated employee," but she is not paid on an hourly basis. Thus,
Cindy is not a qualified employee, and the full fair market value of her
commute from work to home is includible in income. Reg. Section
OTHER
EMPLOYER-PROVIDED TRANSPORTATION There are three methods the employer may use at its election: The
regulations also set limits on the amount that must be included in income
by employees based on their receipt of employer-provided transportation
that is not a qualified transportation fringe and that is not furnished
solely because of unsafe conditions. Employer-provided transportation
is generally valued at its fair market value (Reg. Section 1.61-21(b)(4)),
but a taxpayer may elect to value it using a special valuation
rule: the auto lease valuation rule (Reg. Section 1.61-21(d), the
vehicle cents-per-mile valuation rule (Reg. Section 1.61-21(e), or the
commuting valuation rule. Reg. Section 1.61-21(f). If the valuation
rule provides a value for the transportation that is less than its fair
market value, the excess is excluded from income.
OBSERVATION: An employer who elects to use one of the three special
valuation methods uses it for the purpose of determining the amount
that has to be included in the employee's income. The
rules are designed to ease the computation and record-keeping requirements
with regard to the amount that the employee has to include in income
and that the employer can deduct as a business expense. An employer does
not have to use the same method for all vehicles provided to employees,
but can apply them on a vehicle-by-vehicle basis.
PRACTICE TIP: No formal election is required. An employer is deemed to
have elected a particular method (in the year the vehicle is first
made available to the employee) by using the method to value the fringe
benefit for reporting and tax purposes. The
methods are described below. In each case the employer must treat the
value of the benefit as wages and demonstrate a good-faith effort to treat
the benefit correctly for reporting purposes. The
annual lease value of an automobile is derived from an IRS table based on
the fair market value of the automobile as of the first date that it is
made available to the employee for personal use. The method takes into
account the value of fuel, which can be valued based on faith and
circumstances, or alternatively at 5.5 cents a mile. The value so
calculated remains in effect through December 31 of the fourth full year
of the employee's use. It is then redetermined based on the FMV of the car
as of January 1 of the year following the first four-year period. Once
adopted, the method must be used for all subsequent years that the
automobile is available to the employee. There is one exception. If the
vehicle still qualifies during the period under the commuting valuation
rule, it can be adopted. The method is authorized by Reg. Section
1.61-21(d).
PRACTICE TIP: The table for use in calculating the annual lease value
under the auto lease valuation rule is found at Reg. Section 1.61-
21(d)(2)(iii), Under
this method, the value of the employee's use of the vehicle solely for
commuting purposes is $1.50 per one-way commute. If
more than one employee commutes in a single vehicle, it is $1.50 per
one-way commute for each employee. Reg. Section 1.61-21(f)(3)(11).
If the
taxpayer elects to use this method, any value above this amount is
excluded from income. The
method may only be used if the following five requirements are satisfied:
(1) The vehicle is owned by the employer and used for the employer's trade
or business;
(2) the employer requires the employee to commute to and/or from work in a
business vehicle;
(3) the employee has a written policy forbidding personal use of the
vehicle other than commuting or de minimis personal use;
(4) the employee does not use the vehicle for any personal purposes, other
than commuting; and
(5) the employee is not a "control employee." Control employees
are directors, 1 percent or more shareholders, certain officers, and
employees whose compensation exceeds $100,000 (indexed for inflation).
Reg. Section 1.61-21(f)(1). The
value of the benefit under this method equals the total number of miles
that the employee drives the vehicle for personal purposes in the tax
year, times the optional standard mileage rate. In order to use it, either
of the following tests must be met:
(1) The employer must reasonably expects that the automobile will be used
regularly throughout the year in the employer's trade or
business; or
(2) the automobile must be driven at least 10,000 miles per year,
principally by employees. The
standard rate includes maintenance, insurance, and fuel provided by
employers. The standard mileage rate for transportation expenses paid or incurred
in 2001 is 34.5 cents per mile for all business miles. For 2000, it was
32.5 cents per mile; and for 1999 (after April 1), it was 31 cents per
mile. See Rev Proc 2000-48. Once
this method is adopted, it must continue to be used as long as the vehicle
qualifies, except that the commuting valuation method can be used Employer Can Elect to Forego the Withholding Tax An
employer also can elect not to withhold income taxes with respect to a
vehicle fringe benefit provided to an employee, as long as the employee
receives proper notice of the election. Code Section 3402(s). Vehicle fringe benefits must be treated as wages from which taxes are deducted and withheld for purposes of the employee's Form W-2, even if taxes are not actually withheld. Code Section 3402(s).
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Engagement Status Letter ~ WARNING!
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Bob Parrish
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Revised: February 26, 2007
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