Category: Employee Benefits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Here is a draft of the letter we discussed. I can send this to you as an e-mail attachment to avoid retyping if you wish. Please let me know if you have e-mail capabilities. Dear XXXXX:
This letter discusses the income and employment tax ramification of providing a leased automobile for the exclusive use of an employee. As I understand it, the Company will lease an automobile valued at $35,500 for the exclusive use of a certain employee. The Company will pay the lease payments of $534 per month, insurance, maintenance, license fees and taxes, and gasoline. The employee will report periodically to the Company (no less than quarterly) the business usage of the automobile (i.e., business miles versus total miles for a given time period). Employee Tax Consequences In general, employer-provided fringe benefits represent compensation to the employee based on the fair market value of the fringe benefit provided. Employment taxes are applicable to such amounts just as if the employee had received cash wages in like amount. Because of the practical difficulties involved in valuing the availability of an employer-provided automobile, the IRS has created a special rule called the "annual lease value" method. Although the annual lease value method is not the only way of handling this issue, it is by far the simplest way for the employer and ordinarily produces a lower amount of income reportable to the employee than other methods. Under the annual lease value method, the employer includes in the employee's W-2 income an amount from an IRS-provided table based on the fair market value of the automobile provided. This amount takes into account the value of the automobile itself--the cost of purchasing or leasing the vehicle plus the cost of insurance, taxes and license fees--plus the cost of maintaining the vehicle mechanically. The annual lease value amount per the IRS table for an automobile worth $35,500 is $9,250. This amount assumes 100% personal use of the vehicle by the employee. To the extent that personal usage is less than 100%, the amount includible in the employee's W-2 income is reduced proportionately. Assume that the employee in question uses the automobile 90% for business purposes and 10% for personal purposes including commuting. The amount includible in the employee's income related to the availability of the automobile would be 10% of $9,250 or $925 per year. The annual lease value method does not take into account the cost of fuel. If the Company also provides fuel, an additional amount must be added to the employee's income. The employer can choose to account for fuel based on its actual cost or use a simplified method. Under the simplified method, fuel is valued at 5.5 cents per mile. Again, the assumption is 100% business use, and the amount actually includible is reduced proportionately for the employee's business usage of the car. Assume that the employee reports total usage of 1,000 miles per month and business usage of 900 miles per month; in other words, 90% business usage. The amount includible in the employee's W-2 for fuel would be 100 miles per month personal usage at 5.5 cents per mile$5.50 per month. In this example, I have used 90% business usage simply for illustrative purposes. Keep in mind that commuting from the employee's home to the office is considered personal use of the automobile. Also keep in mind that it is ultimately the employer's responsibility to support the business usage claimed by the employee. It would be wise to evaluate the employee's statements regarding business usage for reasonability taking into account the employee's commuting distance to the office. If the employee in our example who drives 1,000 miles per month has a 20-mile round-trip commute and comes to the office 5 days per week, then there is 10% personal use in commuting alone. Obviously, the reported personal usage must be at least high enough to take into account the employee's commuting habits at a bare minimum. Otherwise, the business usage claimed is not credible on its face. IRS examiners routinely press this point. Employer Tax Consequences The annual lease value method and the simplified method of dealing with the cost of employer-provided fuel do not affect the employer's deductions at all. These methods simply represent short-cut, simplified rules for dealing with valuing the employee's personal use of an employer-provided automobile. The employer is able to deduct the full amount of all expenses relating to ownership and maintenance of the automobile. In other words, the Company reports and deducts in full the lease payments, maintenance, taxes, license fees, and the actual cost of providing fuel. There is one additional item that must be taken into account where automobiles are concerned. You may be aware of what is commonly called the luxury car rules in which the deductions associated with ownership of what the government considers a luxury car are curtailed. For leased automobiles there is another IRS table that provides certain amounts that must be included annually in taxable income to take into account these rules. For an automobile worth $35,500, the amount is $161 for the first year, $355 for the second year, $526 for the third year, and $631 for the fourth year. These amounts have nothing to do with personal versus business use. 100% of the amounts set forth above must be included in taxable income as set forth above to account for the luxury car rules. |
