Taxation of Fringe Benefits: Company Cars

The taxation of employee use of a company car depends on whether the employee is also an owner of the business. For non-owners, the employer may choose to treat all employee use as personal use and add the fringe benefit value to the employee's gross income. If personal use is de minimis, the employer does not need to add the value to the employee’s gross income.

If the employee is also an owner of the business, the amount added to gross income depends on the fair market value (FMR) of the car or its annual lease value (ALV). The FMR is determined by the cost of leasing a comparable vehicle. The ALV depends on the FMV of the car when the car is first used for personal purposes, determined by IRS tables that list ALV values according to the FMR.

For cars exceeding the value in the IRS tables, multiply the FMR by 25%, then add $500. This figure applies for a 4-year period, starting with the year of the ALV election. Afterward, the ALV will be based on FMV at the start of each subsequent 4-year period.

If the employee uses the car for only a part of a year, the ALV figure must be reduced by multiplying the ALV by the number of days of use divided by the number of days in a year.

The ALV method already accounts for maintenance and insurance costs but not fuel. Fuel is valued at FMV or 5.5 percents per mile. If the fuel is paid by a company credit card, the actual amount charged prorated by the employee’s business use is added to the employee’s gross income.

The standard mileage rate can also be used to value personal use of a company car but only if the car is used at least 50% for business and the car FMV does not exceed an annual limit, adjusted for inflation:

• 2024: $62,000

The business use requirement can also be satisfied if the car is used by at least 3 employees to commute to work each workday in a carpool or if the employee drives at least 10,000 miles during the calendar year: the $10,000 must be prorated if use is less than 1 year.

There is also a special commuting rule for employers who must transport employees because of unsafe conditions if these conditions are satisfied:

• The car must be owned or leased by the employer.
• The policy preventing the use of vehicles for personal use other than for commuting must be written.
• The employees cannot be control employees earning at least $135,000, 1% owners, or employees whose compensation is at least an inflation-adjusted limit:
  • 2024: $275,000

If the commuting rule is satisfied, then $1.50 each way, or $3 per round trip, is added to the employees’ gross income regardless of commuting distance: this applies to each employee even if they ride in the same vehicle.

Reimbursement methods that can be tax free to employees include reimbursing employees by the standard mileage rate or by the fixed and variable rate (FAVR) allowance. The FAVR allowance covers fixed and variable costs, including a mileage rate and a fixed amount for fixed costs, including depreciation or lease payments, for vehicles that do not cost more than an annually adjusted limit:

• 2024: $62,000