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The Internal Revenue Service considers a company car as a taxable non-cash fringe benefit. Your employer will report its cash value in Box 1 and describe it in Box 14 of your annual W-2 form. or report its cash value on a 1099-MISC if you’re an independent contractor. Its worth in terms of income — and the amount of income tax you’ll pay — depends on whether and how much you used the car for personal reasons during the calendar year.
IRS rules say that a company car used strictly for business has no value in terms of taxable income. Using it will not affect reported wages or increase your income tax bill, no matter how many miles you drive. However, if you also use the car for personal reasons, then you must distinguish between business and non-business miles. It’s vital to keep a mileage log because 100 percent of the car’s value will count as income on your annual W-2 or 1099-MISC, if you can’t make this distinction.
The IRS doesn’t have a specific form or method you must use to track and differentiate between business and personal use miles, but it does include a sample form on page 27 of Publication 463 – Travel, Entertainment, Gift and Car Expenses.
In the IRS Publication 15-B Employer’s Tax Guide to Fringe Benefits, section 3 outlines a number of methods used for determining the value of a company car. If you’re allowed to use the vehicle for personal use, your employer will likely use either the cents-per-mile rule or the lease value rule.
As of the date of publication, the cents-per-mile rule considers each personal mile driven by an employee or an independent contractor as equivalent to 56 cents in wages if you pay all fuel costs and 50.5 cents in wages if your employer pays for the fuel. To calculate the full value, multiply the applicable mileage rate by the total number of personal miles driven. For example, if according to your mileage log, 455 of 7,000 miles were for personal use and you paid for fuel, the fringe benefit is equivalent to $254.80 in taxable income. If your employer paid for the fuel, it is equivalent to $229.78.
The lease value rule, which applies only to a leased vehicle, bases the worth of the car in income on the fair market value and annual lease value of the car according to Table 3-1 in IRS Publication 15-B, as of the first day you use it for a personal reason. To calculate the value, divide the total number of personal miles driven by the total miles and then multiply the result by the annual lease value.
For example, if according to your mileage log, 455 of 7,000 miles were for personal use and you paid for fuel, a car with a FMV of $12,500 — and a corresponding annual lease value of $3,600 is equivalent to $234 — (455/7000)x3,600 — in wages.
The lease value rule does not include the value of fuel, regardless of who pays for it. Therefore, your employer can include a separate, 5.5 cent-per-mile charge for all miles driven or apply this charge only to personal miles.
Detailed driving records are the key to reducing a company car’s value in terms of income. Timely record keeping is also vital, as the longer you wait to record driving miles, the less accurate your recall may be. To prevent this, the IRS recommends that you distinguish between business and personal miles at, or as close as possible to, the time of each driving trip.