Payroll in Practice: 4.1.2024

Question: Personal use of an employer-provided automobile is a taxable fringe benefit to the employee. What methods may be used to determine the taxable value of an employer-provided automobile?

Answer: In most cases, employers must use the general valuation rule to value a fringe benefit. Under this rule, the value of a fringe benefit is its fair market value, which is the amount the employee would normally have to pay a third party for the benefit. This valuation is based on all relevant facts and circumstances and is not determined by the amount the employee considers to be the value or by the cost to the benefit provider.

For an employer-provided vehicle, the FMV is generally the amount the employee would have to pay to lease the same or similar vehicle from a third party. When determining the FMV, the employer should assume the same geographic area of use, annual lease value, and comparable lease term. For the general valuation rule, the comparable lease term is the amount of time the employee can use the vehicle.

If an employee uses the vehicle for personal use as well, the value of an employer-provided automobile may be determined using the lease-value method. For this rule, an automobile is defined as any four-wheeled vehicle manufactured primarily for use on public streets, roads, and highways.

The value of personal use of an employer-provided automobile is determined from its annual lease value. If the employee uses the automobile in the employer’s business, the lease value is reduced by the amount that would be an allowable employee business expense deduction if the employee had paid for the vehicle. The remaining amount of the lease value is attributable to personal use. Generally, commuting is considered personal use.

The employee must account for the business use under an accountable plan. This includes substantiation of the business use, such as mileage records, as well as documentation of the time, place, and business purpose of the travel. This is best done with written records made at times when the automobile was used for business. Substantiated business use is excludible from employee income as a working condition fringe benefit. The value of any use of an employer-provided vehicle that is not substantiated as business use is included in the employee’s income as wages.

The annual lease value for automobiles with FMVs of less than $60,000 is determined using Table 3-1 Annual Lease Value Table found in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits. For example, if the FMV is determined to be $28,500, the Column 1 range is $28,000 to $29,999 and the annual lease value in Column 2 is $7,750.

If the FMV is $60,000 or more, the annual lease value is $500 plus 25% of the FMV.

The employer determines the FMV of the automobile on the first date the vehicle is made available to any employee for personal use. Publication 15-B discusses how to determine the FMV, including safe-harbor values for purchased and leased vehicles and items or costs that are included or excluded in determining the FMV.

If the automobile is used for both personal and business use the annual lease value is multiplied by the percentage of personal miles divided by total miles driven by the employee. For example, during 2024 an employee drives an employer provided automobile, $7,750 FMV), a total of 23,800 miles. The employee substantiates 8,200 miles as used for business. The remaining 15,600 miles, 65.5% of total miles, are personal use miles. The taxable benefit to the employee is $5,073.89 (65.5% of $7,750 annual lease value).

The table is based on a four-year lease term. The values generally stay the same beginning the first date that the lease value period is used for the automobile and ending on Dec. 31 of the fourth full calendar year following that date. The FMV of the vehicle may be recalculated as of Jan. 1 following the end of the fourth full year of each four-year term. The employer determines the vehicle’s FMV on Jan. 1 of the first year of the new four-year period and then uses the lease-value table to determine the new lease value.

For example, an employee first uses an employer-provided automobile in June 2020. The automobile was, therefore, only used for part of 2020, so the first full year is 2021 and the end of the four-year period is Dec. 31, 2024. The new four-year period starts Jan. 1, 2025.

There are other methods of valuing an employer-provided vehicle that may be used in certain circumstances. The specific conditions and requirements for the employer use these methods are described in IRS Publication 15-B.

The cents-per-mile rule determines the value of the personal use of the vehicle by multiplying the number of personal miles driven by the standard mileage rate, currently 67 cents per mile. The employer may use this rule if the employer reasonably expects the vehicle to be regularly used in the employer’s trade or business or the vehicle meets the mileage test. The vehicle meets the mileage test if it is driven at least 10,000 miles during the year and is used primarily by employees.

The commuting rule and unsafe conditions commuting rule apply a value of $1.50 to each one-way commute from home to work or from work to home using a vehicle the employer provides for commuting. If more than one employee commutes in the vehicle, the $1.50 amount applies to each employee. These rules have specific qualification requirements including a written policy disallowing personal use other than commuting or de minimis personal use.

Under the commuting rule, the vehicle is provided for the employee for bona fide noncompensatory business reasons such as an employer-sponsored commuting pool and, if a four-wheeled vehicle, the employee who uses it is not a control employee. To rely on the unsafe conditions commuting rule, the employee would ordinarily walk or use public transportation for commuting and the employee may not use the vehicle for personal purposes other than commuting because of unsafe conditions.

Consistency is required when the lease value rule is used. The employer must begin using the lease value rule on the first day the automobile is made available to the employee. However, if the commuting rule or the cents-per-mile rule was used when the automobile was first made available to any employee for personal use, the employer can change to the lease value rule on the first day the commuting rule is not used, or the automobile no longer qualifies for the cents-per-mile rule.

The employer must use the lease value rule for all later years the automobile is made available to any employee. However, employers may use the commuting rule for any year during which the vehicle qualifies. The employer must also continue to use the lease value rule if the vehicle is replaced as a means to reduce federal taxes.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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