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Business use of autos.


One of the most common travel arrangements, especially for small businesses, is an employee using his or her own car for business travel. While the situation is common, the treatment of reimbursing the employee for the expenses of this travel must be carefully examined.



At one time, the treatment of reimbursements for employee business expenses was very simple. The employer reimbursed the employee for the amount spent, resulting in a wash" for the employee on his personal individual tax return. The reimbursement was recorded as income by the employee, but, at the same time, a deduction for the same amount was allowed as an adjustment to gross income.

Since 1989, however, such reimbursements are allowed as adjustments to gross income only if they are paid under an accountable" plan. (See JofA, July 9O, page 12.) Under such a plan, the reimbursement must have a business purpose, the employee must substantiate the expense to the employer and any excess reimbursement must be returned within a reasonable time after it is paid. lf reimbursements are made under an accountable plan, neither the reimbursement nor the corresponding expense must be reported on the employee's individual tax return. In addition, these payments need not be reported on the employee's form W-2, and no withholding is required. If the arrangement did these requirements, it would be considered nonaccountable; the reimbursements would be includable in the employee's gross income and subject to the withholding of income and employment taxes. The employee's auto expenses would then be deductible only as a miscellaneous itemized deduction (subject to a percentage of adjusted gross income limitation).


Employees paid a monthly car allowance are subject to these same rules. If the employee properly accounts for his expenses, there will be no problems. However, if the employee fails to account properly and fails to return the excess (the amounts attributable to miles not actually driven or not substantiated), the excess will be considered as paid under a nonaccountable plan.

Mileage allowances. If an employer uses a mileage allowance plan, this allowance amount is meant to cover all actual expenses. If the standard mileage rate ($.271/2per business mile for 1991) is used, the time, business purpose and use must be documented.

Some employers provide employees with monthly auto allowances. These plans must meet the rules applicable for accountable plans. As such, any excess mileage amounts must be returned to the employer within a reasonable time. Otherwise they will be treated as nonaccountable plans.

Note: An employer may choose a mileage rate higher than the standard mileage allowance. However, the excess over the standard amount must be reported on the employee's W-2 and is subject to withholding. NO REIMBURSEMENT If an employee owns an automobile and his employer does not reimburse him for the business use of his car, requirements that the car ownership is a condition of employment and is for the employer's convenience may prove to be extremely difficult standards to meet.


While, in theory, leasing the employee's car to the employer is possible, there are several issues that must be considered. This would most likely occur within the context of employee -shareholders and their corporations.

Leasing business. If an employee leases his car to his employer, the lease payments will be considered rental income. He can offset this income with depreciation deductions and deductions for operating expenses only if he is in the business of leasing. To qualify, leases must be frequent over a continuous period of time. Occasional or incidental leasing activity is not sufficient; an individual leasing only one passenger car during a tax year does not meet this standard.

Passive activity rules. The passive activity rules would also come into play. The rental income would be considered passive income, unless the employee can qualify under the material participation rules. (This may be possible for an S shareholder who rents his car to his corporation or a partner renting to his partnership.) For a discussion of some of the issues involved in this area, see "Business Use of Automobiles," by Philip Storrer, in the January and February 1991 issues of The Tax Adviser.

Nicholas J. Fiore, editor

The Tax Adviser
COPYRIGHT 1991 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Fiore, Nicholas J.
Publication:Journal of Accountancy
Date:Feb 1, 1991
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