This blog was written and produced by Cheryl Prout, CPA, and Emily DiGesare, Experienced Assistant Accountant at The Bonadio Group. Looking to get in touch with Cheryl or Emily? Reach out today: Cheryl Prout, CPA, cprout@bonadio.com and Emily DiGesare, edigesare@bonadio.com.
The company car has long been a popular perk or fringe benefit for company owners and key employees. This benefit yields substantial non-tax as well as tax benefits for the owner and employee, as well as tax deductions for the employer.
However, there are rules employers must follow consistently when providing company-owned vehicles to employees. A portion of the value of the company provided vehicle must be taxed to the employee annually for any personal usage.
There are also record-keeping requirements that employers must follow to use this fringe benefit. The only way to distinguish between employment-related business driving and personal driving is based on mileage. The employee must keep a diary or similar record with detailed entries for employment-connected business usage of the auto (time, place, mileage, business purpose).
Note that if all personal use of the auto by an owner or employee is properly treated as fringe benefit compensation income, the auto will be treated as if it were 100 percent used for business. That means the employer may deduct all its operating expenses and may also claim all of the otherwise allowable depreciation deductions or lease deductions.
For passenger autos, immediate first-year expensing is limited to $18,100. These restrictions don’t apply if the company-owned vehicle is a heavy SUV with a gross vehicle weight rating (GVWR) of over 6,000 pounds. Because such vehicles fall outside of the definition of a passenger auto, the 100 percent first-year bonus depreciation rules apply and write off of its entire cost is allowed in the first year.
For leased autos, a business that leases an auto for its owner or key employee may deduct the full lease payment, assuming personal use is properly treated as compensation income. However, for leases with a term beginning in 2019, unless the auto is priced below $50,000, the business must include a certain amount in income during each year of the lease. This income inclusion amount varies with the initial FMV of the leased auto, the lease term and the year of the lease, and is adjusted for inflation each year.
The company auto has long been a go-to fringe benefit for the company owner or key employee. It can provide company owners or key employees with the use of an auto at a low tax cost while generating tax deductions for the company. If you would like additional information regarding this issue, and how both employers and employees can benefit, please contact one of our Bonadio experts today.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
