Tax Tips
Maximize Tax Benefits for Business-Car Use - February 2009
Richard Scrivanich - Partner
If you're an employee, you may drive a car for business. If you're an employer, some of your employees are likely to do some business driving. To help trim your costs, you should know the tax rules.
Employees' cars
When employees use their own cars for business driving, the company can reimburse them. (Reimbursement isn't allowed for commuting to and from work, however). Typically, employees will report business use of their cars and receive a payment from the company. Often, reimbursement is based on cents-per-mile. As long as the rate is equal to or less than the IRS standard rate, there are no tax consequences. In 2009, that rate is 55 cents per business mile.
Example #1: Alice Wilson drives her own car 1,000 miles for business this month, and the company reimburses her at 50 cents per mile. Alice receives a check for $500: 50 cents times 1,000. Alice does not have to report the income and she owes no tax.
Employees must submit reports to the company in order to avoid owing taxes on their reimbursement. The reports should describe the time, place, and business purpose of the travel. Regardless of whether the company has a suitable reporting system in place, however, excess reimbursements will trigger income tax.
Example #2: Suppose the company's reimbursement rate is 60 cents. Alice Wilson would get a check for $600. Her company would report $50 on her W-2 form as additional income, subject to tax. That's 5 cents (60 cents minus the standard 55 cents) times 1,000 miles.
Company cars
Another common arrangement is for the company to provide cars to certain employees for business use. If this is the case, owners or executives won't have to use their own funds to pay for a business car. Moreover, this perk may help attract and retain valued employees. If you're a business owner, you should weigh these benefits against the cost of using the company's capital to acquire cars.
If the company acquires the cars, some or all of its outlays will be tax deductible. Then employees report personal use of the company car and pay tax on that use. How is this personal use determined? Generally, the company will use an IRS table that lists an "annual lease value" of the car, which is based on the purchase price. The ratio of personal miles to total miles is multiplied by annual lease value to compute taxable income.
Example #3: ABC Co. purchases a car for $30,000 and allows its CEO, Barry Thomas, to use it. He drives 20,000 miles this year, including 5,000 personal miles. His personal use thus equals 25% of the total miles. According to the IRS, a car worth $30,000 has an annual lease value of $8.250. Barry will pick up $2,062.50 (25% times $8,250) of taxable income.
Lease or buy?
If you're a business owner who wants to provide company cars for some employees, should you lease or buy the cars? Historically, leasing has offered the better deal when you take the tax benefits into account. When a company leases the cars, the lease payments are tax deductible. The company will pick up a modest amount of taxable income, called the lease inclusion amount. The purpose of this addition to income is to make the tax treatment of leasing versus owning a vehicle more equitable. Employees will have taxable income for personal use of a leased company car, using the method described above.
Since the Economic Stimulus Act of 2008 raised the maximum first-year depreciation deduction for business cars from around $3,000 to about $11,000 for cars purchased in 2008 and used primarily for business, buying company cars may be relatively more attractive. Slightly higher deductions are available for vans and trucks. (The new law does not alter the limitation imposed on sport utility vehicles, which have an expense limit of $25,000.)
If you have any questions regarding the above discussed topic, or any other tax matter, please feel free to give me a call at (562) 698-9891.
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