What Is a Company Car?
A company car is a car or another vehicle purchased by the business that employs you. A business provides company cars to employees when they need a vehicle in order to accomplish work-related tasks and duties.
While some businesses only allow the use of company cars for business-related purposes, many opt to allow employees to use company cars for personal purposes, too.
If the company car is used only for business purposes, the whole expense of maintenance and operation of the vehicle is on the company and is deductible as a business expense.
However, if company cars are used for personal purposes too, the IRS sets rules on taxation and benefits for the employees benefitting from the vehicle.
Personal use of company cars
Personal uses of a company vehicle include any use that is not directly related to accomplishing work tasks and earning income. Examples of personal use include commuting to and from work, using the car to e.g. get groceries or pick up your kids from school, going on trips and holidays, or any person besides the employee driving the car, such as a family member or friend.
Tax rules on company cars
The use of a company car for personal purposes is considered a benefit and must be added to employees’ incomes, and taxed, as such. This means that unless you reimburse your employer for the personal use of the company car, you are receiving a bonus that will be taxed with both employment and income taxes.
Determining the value of the benefit
If you drive a company car for personal use, your employer must determine what the value of the benefit you receive is, in order to add to your total income. The IRS offers three ways in which this can be determined:
- The lease value rule
- The cents per mile rule
- The commuting rule
The lease value rule lets the business determine the benefit you receive by multiplying the personal miles you’ve driven with the company-owned vehicle’s annual lease value. For this method, employees must track the business and personal mileage of the company car.
The cents per mile rule uses the standard IRS mileage rate to determine the benefit an employee has. This rule can be used if the company car is driven at least 10 000 miles annually, and at least 50% of them are for business purposes. The benefit is calculated by multiplying the standard rate by the number of personal miles. However, if the employee pays the worked-out sum to the business for the personal use of the company car, there is no benefit to be added to the employee’s income.
The commuting rule can only be applied if it is written and official company policy that employees cannot have any other personal use of a company vehicle other than commuting to and from work. Then, a rate is determined per one-way commute. Multiplying the number of times per any allowable period of time (up to annually), the employee commutes with the company car will work out the benefit sum added to the employee’s income and subsequently, taxed.
Do you need to track the mileage you drive with your company car? Learn more about compliant mileage logs, current rates and more in our IRS mileage guide.
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