Rising costs are prompting business owners to be more creative in their business operations. One such area is in how employers compensate their employees for expenses related to business travel.
Standard mileage
The most common way of reimbursing employees for business travel is by applying the IRS business standard mileage rate. This is the most straight-forward method whether the employee is using his or her own vehicle for work-related travel or has been assigned a company car and is permitted to use it for personal use.
The standard mileage rate at the beginning of 2022 was 58.5 cents per mile. In June, however, the IRS increased the standard mileage rate for business travel for the remainder of the year to 62.5 cents per mile in reaction to skyrocketing fuel costs.
Depreciation on a vehicle, maintenance, repairs, tires, fuel, oil, insurance and registration fees are rolled into the standard business mileage rate. To be reimbursed using this method, the employee must keep records of the miles traveled for business and submit those to the employer for reimbursement.
Car allowance
A car allowance is taxable unless you substantiate business use of the payment, as described above. Employees would need to track business mileage and demonstrate that the allowance never exceeds the equivalent of the IRS business mileage rate.
Fixed and variable rate
An employer may also offer a fixed and variable rate car allowance (FAVR). A FAVR plan uses localized cost data to accurately reimburse both the fixed costs of car ownership (insurance, registration/license, taxes, and depreciation) and the variable expenses like gas, tires, maintenance, and oil. The FAVR plan has specific criteria that must be met, so it is not a commonly used method used by businesses.
Both mileage allowances and FAVR allowances require significant administrative work, so most companies just pay a standard allowance. However, because taxes can eat up 30-40 % of your allowance, a non-taxable car allowance can make the complications worth it.
Businesses have moved away from providing company cars in lieu of making cash payments to employees for the business use of their personal vehicle. However, keep in mind that car allowances paid without any substantiation of business use are fully taxable and subject income tax withholdings.
Some businesses provide vehicles for their employees to use for business purposes so that the employee does not need to use their own vehicle and the employer does not need to worry about reimbursing them for business miles. If the employee is able to take the vehicle home each day and use it for personal purposes, the personal portion is considered a taxable noncash employee fringe benefit. The values of that benefit must be reported on the employee’s W-2 at the end of the year.
Personal use of company car includes:
- Commuting to and from work;
- Running a personal errand;
- Vacation or weekend use; or
- Use by a spouse or dependent.
Various methods can be used to calculate the value of employee’s personal use of a company vehicle, including:
- General valuation rule;
- Cents-per-mile rule;
- Commuting rule; and
- Lease value rule.
The general valuation and cents-per-mile rules are the mostly commonly used ways to determine the value of the employee’s use of the vehicle.
In short, with the general valuation rule, you use the fair market value of the vehicle, which is the price the employee would pay a third party to buy or lease a similar vehicle on similar terms in the geographic area where the employee uses the vehicle.
To use the cents-per-mile rule, on the other hand, calculate the miles driven for personal use by the employee multiplied by the IRS standard mileage rate. There are some conditions for this rule, including that at least 50% of the total mileage each year is for business and the vehicle is driven by employees at least 10,000 miles per year for both business and personal use combined.
The commuting and lease value rules may also be options to consider, but there are exceptions and complexities to some of the reporting.
We are happy to discuss any questions you may have on auto expense reimbursement and personal use of company vehicles.
Nina Daigle, CPA, is a Partner with Antares Group, Inc. She can be reached at ndaigle@antarescpas.com.
