Chapter 53: company car or reimbursement plan.
A car is often an essential business tool for an employee or someone who is self-employed. Employers often provide cars or reimburse expenses for business use of personally owned vehicles. Company cars or car expense reimbursement plans are not employee benefits as such, since their purpose is not actually to compensate the employee. However, an employer's policy regarding business use of cars is often viewed as part of the employer's fringe benefit package.
There are three possible types of arrangements between an employer and employee regarding business use of cars:
(1) Company car. The business can provide the car directly to the employee.
(2) Reimbursement plan. The business can reimburse the employee for costs incurred in using the employee's car for business.
(3) No plan. The employee or self-employed person can assume the costs of business use of the car and deduct them on his or her tax return. (The employee's salary or other compensation implicitly will reflect the fact that the employee assumes this burden.)
For an employee, the first scenario-the company car-generally provides the best tax result, since it can allow all business related car expenses to be excluded from taxable income in all cases. A reimbursement approach, or the unreimbursed use of the employee's car (scenarios two or three) may not allow full deductions since the employee must deduct car expenses as a "miscellaneous expense." These are subject to a 2% of adjusted gross income "floor," as discussed below under "Reporting."
For a self-employed person, all business related car expenses are deductible without a 2% floor.
The tax rules for car expense deductions are inordinately complicated, apparently because Congress and the IRS believe that taxpayers often abuse these provisions. This chapter will summarize the rules for handling deductions and reimbursements for car use.
When is it Indicated?
Because of the administrative complexity of company car plans, company cars are provided primarily where employees use them substantially for business or commuting. They are also provided as a fringe benefit for selected executives in high tax brackets.
Advantages of Company Car Programs
1. The "company car" approach can maximize tax benefits for the employee by avoiding the 2% of adjusted gross income floor for miscellaneous itemized deductions.
2. Companies can maintain maximum control over the cars employees use in business (type of car, maintenance, etc.).
1. Companies must bear the capital investment costs of car ownership. With the termination of the investment credit and less favorable depreciation rules, such an investment has fewer tax benefits than in past years.
2. Companies must bear substantial administrative costs. In particular, if the car is used for personal purposes to a significant extent, the company must bear the burden of determining the value of personal use if the employee is to avoid the 2% floor limitation on miscellaneous itemized deductions (see the rules discussed below).
Tax Treatment of Employer
In a company car plan, the employer is the owner of the car and is entitled to deductions for depreciation, as well as for any other expenses it actually pays.
Employer reporting. The employer must report the value of car availability to affected employees. There are basically three options for reporting:
1. The employer can report the entire value of car availability on the employee's W-2 and the employee can claim a deduction for business use. In this case, the employee is subject to the 2% floor requirement for miscellaneous itemized deductions;
2. The employer can determine the amount of personal or commuting use and report that only; or
3. If the plan meets the requirements for a written plan as discussed below under "Employee Recordkeeping," the employer can report only commuting use for which the employer has not been reimbursed by the employee.
The employer must withhold Social Security (FICA) and FUTA on the amount reported, but the employer can elect not to withhold federal income tax on this amount. (1) If so, the employee may have to increase withholding or estimated tax payments to avoid an underpayment penalty.
The employer can elect a special accounting rule under which fringe benefits, such as company cars, provided during the last two months of a calendar year can be treated as provided during the following calendar year. (2) If the employer elects this treatment, the employee must follow it also.
Valuation of car availability. The taxable value of a car to an employee is the amount an unrelated third party would charge for its use in an arms-length transaction. (3) A comparable lease value can be used.
Alternatively, the employer can elect one of three special valuation rules; if the employer does so, the employee must use either the same rule that the employer elected or the general arms-length rule. (4) The three special rules are:
* A lease value from the IRS' Annual Lease Value Table. (5)
* A mileage rate of .55 cents per mile (in 2009) for all business use. (6) To use the mileage rate the car must be: (1) used more than 50% in business; (2) used each weekday in an employer sponsored commuting pool; or (3) driven at least 10,000 miles during the year and used primarily by employees. Also, the standard mileage rate cannot be used to value the use of any "luxury car" subject to the depreciation limitations of Code Section 280F. (7)
* A "commuting valuation rule" of $1.50 per one-way commute or $3.00 per round trip. To use this rule, the employer must have (and enforce) a written policy that the employee must commute in the vehicle and cannot use the vehicle for other than minimal personal use. This election is unavailable to "control employees" (directors and certain officers and owners--see below). (8)
Tax Treatment of Employee
To the extent used for business, providing a car to an employee is a "working condition fringe" under Code section 132 and, thus, its value is not included in income. (See Chapter 52, Fringe Benefits.) If the car is used for commuting or for personal purposes, the amount included in the employee's income for the year is:
personal/commuting miles / total miles x value of car availability
See the "Questions and Answers" section at the end of this chapter for a definition of "commuting."
The employee is entitled to a business deduction for any expenses the employee actually pays for business use of the automobile (such as gasoline, etc.). The employee is also entitled to a deduction to the extent of business use if the employer chooses to report 100% of the car's availability value on the employee's W-2. (In that case, the employee's deduction on Form 2106, line 27 is the business use percentage of the total amount reported on the W-2.)
However, if the employee claims a deduction in either situation, it must be reported on Schedule A as a miscellaneous deduction and is therefore subject to the 2% of adjusted gross income limitation for such deductions. In other words, the most advantageous company car plan will be one which minimizes or eliminates the need for the employee to claim any business expense deductions.
Employee recordkeeping. If the car is used partly for business and partly for personal use, the employee must keep records substantiating the business use. These are necessary either to allow the employer to determine the amount of business use, or to allow the employee to claim a business deduction if the employer reports 100% of the car's value on the employee's W-2 (see above).
However, if the car is used only for business and commuting, with minimal personal use, the employee does not have to keep records if:
1. the company has a written policy statement (meeting requirements set out in IRS Regulations) of no personal use except for commuting;
2. the employee is not a control employee (director, officer earning $50,000 or more, employee earning $100,000 or more, or 1% or more owner);
3. the employer reports the commuting value on the employee's W-2 to the extent the commuting value is not reimbursed to the employer; and
4. the employee is required, for "bona fide noncompensatory business reasons," to travel to or from work in the vehicle. (9)
REIMBURSEMENT PLANS AND "NO PLANS"
The IRS recognizes three types of reimbursement plans:
1. An accountable plan is one that requires the employee (a) to adequately account to the employer for expenses and (b) return any excess reimbursement to the employer.
2. A nonaccountable plan is one that either (a) does not require the employee to adequately account to the employer, or (b) allows the employee to keep excess reimbursements.
3. No plan-that is, the employer does not reimburse directly at all, and the employee is responsible for paying expenses and is entitled to any deduction for them. However, the employer can indirectly reimburse the employee in this situation by increasing salary or paying a bonus.
The IRS table shown in Figure 53.1 summarizes the employer and employee reporting treatment under these three situations. The IRS table shown in Figure 53.2 summarizes when local transportation expenses are deductible. (10)
Employer W-2 reporting requirements have been discussed above.
For an employee claiming a car expense deduction, Form 2106 must be filed. A simplified Form 2106-EZ may be used in certain situations using the standard mileage rate. Forms 2106 and 2106-EZ can be found at: http://pro.nuco.com/booksupplements/TTEB. The deductible amount determined on Form 2106 is entered on the employee's Schedule A, Form 1040, as a miscellaneous deduction. Miscellaneous deductions, in total, are allowable only to the extent that they exceed 2% of the employee's adjusted gross income.
A self-employed person does not file Form 2106. Instead, car expenses are computed and entered as a deduction on Schedule C, "Income From Business or Profession." There is no 2% of adjusted gross income limitation on Schedule C deductions.
WHERE CAN I GET ADDITIONAL INFORMATION?
The rules in this area are extremely complex. A summary of these rules is found in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, and IRS Publication 535, Business Expenses. IRS regulations under Code sections 61, 132, and 274 also deal with car expenses.
[FIGURE 53.2 OMITTED]
QUESTIONS AND ANSWERS
Question--Is interest on a car loan deductible as a business expense?
Answer--Interest on a car loan is not deductible by most taxpayers. However, if the taxpayer is self-employed, the interest is deductible as a Schedule C deduction, to the extent of business use of the car.
Question--What types of "getting to work" trips are business expenses as opposed to commuting?
Answer--The IRS has persistently attempted to crack down on alleged abuses in this area. Some current IRS positions:
* Using a car telephone for business calls, carrying tools or instruments, or having advertising signs on your car will not cause a commute to be considered a business trip.
* If you work at two different workplaces, the cost of getting from one place to the other is deductible as a business expense. The cost of traveling between an office at home and other work locations is a deductible business expense if the home office is the principal place of business. But a commute to and from home to a part-time job is not a deductible expense. See the IRS chart at Figure 53.2.
* You can deduct the round trip cost of travel from your home to a temporary work assignment (i.e., where work is initially expected to last for a year or less and actually does last for a year or less) if the temporary work is located outside the metropolitan area where you live. (11)
Question--How does the car expense deduction differ if the car is used 50% or less (as opposed to more than 50%) for business purposes?
Answer--The amount of the deduction allowed for depreciation is computed in a different, less favorable way if the car is used 50% or less for business.
If the car is used 50% or less for business, the taxpayer must compute depreciation on a straight-line basis over a five-year period. Neither accelerated depreciation nor the Section 179 election to expense (12) can be used.
Question--When can the "standard mileage rate" be used to compute car business expenses?
Answer--Generally, whenever a taxpayer wants to deduct car business expenses, there is a choice between determining the actual expenses and using the simpler standard mileage rate. The mileage rate for 2009 is 55 cents per mile for all business use. (13)
In order to use the standard mileage rate the taxpayer must choose the standard mileage rate method for the first year in which the car was placed in service in business. If actual expenses (using certain accelerated depreciation) are used in the first year, the mileage rate cannot be used in later years. But if the mileage rate is used in the first year the taxpayer can change to actual expenses in later years.
(1.) IRC Sections 3121(a)(20), 3402(s).
(2.) Ann. 85-113, 1985-31 IRB 31; see Treas. Reg. [section]1.61-21(c)(7).
(3.) Treas. Reg. [section]1.61-21(b)(4).
(4.) Treas. Reg. [section]1.61-21(b)(4).
(5.) Treas. Reg. [section]1.61-21(d)(2).
(6.) Rev. Proc. 2008-72, 2008-50 IRB 1286.
(7.) Treas. Reg. [section]1.61-21(e)(1)(iii).
(8.) Treas. Reg. [section]1.61-21(f).
(9.) Treas. Regs. [section][section]1.61-21(f), 1.132-5(f), 1.274-6T(a)(3), 1.274-6T(d).
(10.) These tables are found in IRS Pub. 463, Travel, Entertainment, Gift, and Car Expenses, revised annually.
(11.) Rev. Rul. 99-7, 1 CB 361.
(12.) Treas. Reg. [section]1.179-1(d).
(13.) Rev. Proc. 2008-72, 2008-50 IRB 1286.
Figure 53.1 REPORTING TRAVEL, ENTERTAINMENT, GIFT AND CAR EXPENSES AND REIMBURSEMENTS Type of Reimbursement (or Other Expense Allowance) Arrangement Employer Reports on Form W-2 Accountable Plan Actual expense reimbursement No amount. Adequate accounting made and excess returned Actual expense reimbursement Excess reported as wages in Box 1. Adequate accounting and return of excess both required but excess not returned Per diem or mileage allowance No amount. up to federal rate Adequate accounting made and excess returned Per diem or mileage allowance Excess reported as wages in up to the federal rate Box 1. Amount up to the federal rate is reported Adequate accounting and only in Box 12--it return of excess both is not reported in Box 1. required but excess not returned Per diem or mileage allowance Excess reported as wages in exceeds the federal rate Box 1. Amount up to the federal rate is reported Adequate accounting up only in Box 12--it to the federal rate only is not reported in Box 1. and excess not returned Nonaccountable Plan Either adequate accounting or Entire amount is reported as return of excess, or both, not wages in Box 1. required by plan No Reimbursement Plan Entire amount is reported wages in Box 1. Type of Reimbursement (or Other Expense Employee Reports Allowance) Arrangement on Form 2106 (1) Accountable Plan Actual expense reimbursement No amount. Adequate accounting made and excess returned Actual expense reimbursement No amount. Adequate accounting and return of excess both required but excess not returned Per diem or mileage allowance All expenses and up to federal rate reimbursements only if excess expenses are claimed. Adequate accounting made Otherwise form is not filed. and excess returned Per diem or mileage allowance No amount. up to the federal rate Adequate accounting and return of excess both required but excess not returned Per diem or mileage allowance All expenses (and reimbursements exceeds the federal rate reported on Form W-2, box 12) only if expenses Adequate accounting up in excess of the federal to the federal rate only rate are claimed. Otherwise, and excess not returned form is not filed. Nonaccountable Plan Either adequate accounting or All expenses. return of excess, or both, not required by plan No Reimbursement Plan All expenses. (1) You may be able to use Form 2106-EZ. See Completing Forms 2106 and 2106-EZ in Chapter 6 of IRS Pub. 463.
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|Title Annotation:||Fringe Benefits|
|Publication:||Tools & Techniques of Employee Benefit and Retirement Planning, 11th ed.|
|Date:||Jan 1, 2009|
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