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. Now that gas prices
are well above $3 per gallon, such driving can be
extremely expensive. 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 2008, that rate is 50.5
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 55 cents. Alice Wilson would get a check for
$550. Her company would report $45 on her W-2 form
as additional income, subject to tax. That's 4.5 cents
(55 cents minus the standard 50.5 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 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 the
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.
This year, buying company cars may be relatively
more attractive. The Economic Stimulus Act of 2008
raises the maximum first-year depreciation deduction
for business cars from around $3,000 to about $11,000
for cars purchases in 2008 and used primarily for
business. 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.)
Our office can help you crunch the numbers under
the new law to see whether buying or leasing works
better for you.
|
Automobile
|
|
Fair Market Value
|
Annual Lease Value
|
|
$20,000
|
$5,600
|
|
$25,000
|
$6,850
|
|
$30,000
|
$8,250
|
|
$35,000
|
$9,250
|
|
$40,000
|
$10,750
|
|
$45,000
|
$11,750
|
|
$50,000
|
$13,250
|
| Source:
IRS |
