Company cars as fringe benefits

A company car is an extremely popular "perk" or fringe benefit for company owners and key employees. In the words of Avery E. Neumark, JD, CPA, executive perquisites and fringe benefits "add sparkle" and maximize the benefit/cost ratio.

The use of an employer-owned car for personal use is an item of noncash compensation to the employee.

The rules that determine how much this compensation is, and what can be deducted by the employer are extremely complex — enough to make you consider giving the employee a laptop instead of a company car.

While we can't cover all of the ins and outs of this complicated area, here is how it works in general: Mr. CEO will drive a car 7,500 miles a year for business.

He also will drive 7,500 miles for personal and family trips. The employer company buys a new $60,000 car for Mr. CEO to drive.

Mr. CEO's cost for the 50 percent personal use of the vehicle will be the income tax he pays on the fringe benefit value of his 50 percent personal mileage. If Mr. CEO had purchased the car himself, he would have had to do so with after-tax dollars.

The employer's company treats the car as it would any other piece of business equipment.

It is depreciable, subject to some restrictions, and part of the cost may be expensed in the first year. Because of the "luxury auto" deduction limits some of these depreciation deductions will be curtailed. Special rules apply to "heavy SUVs."

Out-of-pocket expenses such as insurance, oil, gas and maintenance are 100 percent deductible by the employer, including the part that relates to Mr. CEO's personal use.

If Mr. CEO bought the car himself, he could claim deductions only for the business use portion of these costs. If the company financed the car purchase, 100 percent of the interest is deductible. If Mr. CEO financed the car purchase, none of the interest is deductible (unless he used a home equity loan to do it).

The value of Mr. CEO's 50 percent personal use of a company car is a taxable fringe benefit. It is included in Mr. CEO's W-2 as noncash compensation.

The employer must pay FICA taxes on this compensation but only to the extent the employee's compensation does not exceed the taxable wage base, which is $102,000 in 2008.

The amount of income reportable to Mr. CEO is the fair market value of the personal use portion of the car.

How is that determined? There are various ways to determine what amount is taxable income.

1. Fair Market Value Method. The fair market value is the amount Mr. CEO would have to pay to lease a similar car for the same period of time.

Once the value is established, Mr. CEO, in our example, would have income equal to 50 percent of that amount. The company also must include in Mr. CEO's income the other costs for gas, oil, maintenance, etc., that are paid by the employer.

2. Table Value Method. The fair market value of the car when it is made available to Mr. CEO is determined. There are some safe harbors available for this. The IRS then provides a table which determines lease value. This value is multiplied by the ratio of Mr. CEO's personal mileage to the total mileage.

3. Cents Per Mile Method, and

4. Commuting value method. Because of the many restrictions placed on the cents-per-mile and commuting value methods, the fair market value method and the table value method are the only methods that are effectively available for owners or key employees.

Alternatively, Mr. CEO may prefer to own his own car and have the company reimburse him for the cost of the business use. The amount of reimbursement is a fringe benefit, taxable to Mr. CEO.

Whether the car is owned by the company or the individual, the company's and the employee's deductions are calculated either by itemizing actual expenses or by using the standard mileage rate, which for 2008 is 50.5 cents per mile. Itemizing actual expenses may give a bigger deduction, but most people use the standard mileage of 50.5 cents a mile because of the extra effort of recording all the costs.

The company car is a popular fringe benefit. It lends that "sparkle" of a status symbol at a low tax cost to the employee and generates deductions for the employer.

http://articles.lancasteronline.com/local/4/223087

Business Financial Services

Company cars as fringe benefits