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Benefits

When Can a Cents-Per-Mile Method Be Used to Determine the Value of an Employee’s Personal Use of a Company Car?

EBIA  

EBIA  

QUESTION: One of our executives has complained that we reported too much income for personal use of a company car. The executive says we should have used a cents-per-mile method to determine that value. The method we used was based on the car’s lease value. Could we have used the cents-per-mile method? Are we obligated to use that method if it produces the lowest income for this employee?

ANSWER: The value of personal use of a company car can be established using a general valuation rule or one of several special valuation rules. The general rule and one of the special rules are based on lease values. Another special valuation rule takes a fixed cents-per-mile approach. Employees are familiar with the cents-per-mile concept because a similar method is commonly used to determine reimbursements and tax deductions for the business use of employees’ own vehicles. But the cents-per-mile method for valuing personal use of a company car is only available in very limited circumstances and might not be available to value personal use of your executive’s car. When it is available, your company is not obligated to use it.

One of the conditions for using the cents-per-mile valuation method is that the car’s fair market value must not exceed an annually adjusted maximum. Prior to 2018, that maximum value was quite low. For 2017, it was only $15,900 for passenger automobiles other than trucks and vans. But for years after 2017, in accordance with the Tax Cuts and Jobs Act, the maximum values are considerably higher. For passenger automobiles first made available to employees in 2018 the maximum was $50,000, and for 2019 the maximum is $50,400. (The 2018 and 2019 maximums also apply to trucks and vans.) Generally, the cents-per-mile valuation method must be used consistently from the first day a vehicle is made available to an employee for personal use. Due to the magnitude of this change, however, the IRS adopted a transition rule allowing some employers that were unable to use the cents-per-mile rule prior to 2018 to begin using the rule in 2018 or 2019 (see our Checkpoint article).

In addition to the fair market value condition, one of two other conditions must be met to use the cents-per-mile method to determine the value of personal use of a company car. Either (1) the employer must reasonably expect that the vehicle will be regularly used for the employer’s business throughout the year or the entire period the employer owns or leases the vehicle, whichever is shorter; or (2) the vehicle must actually be driven at least 10,000 miles during the calendar year, and that use must be primarily by employees.

Even if the necessary conditions were met, and your company could have used the cents-per-mile method, your company was not wrong to use a different method. The regulations allow the employer to choose which available valuation method will be used. Employers can use different methods for different vehicles, and they are not obligated to choose the method that minimizes each employee’s income. They can (and often do) choose to use a single uniform method for all company vehicles. Although not technically required, it may be useful to send an annual memo to affected employees explaining the method your company uses to calculate their car-related income.

For more information, see EBIA’s Fringe Benefits manual at Sections IV.C.2.c (“Cents-Per-Mile Rule”) and IV.F (“Employer Reimbursements for Business Use of an Employee’s Car”).

Contributing Editors: EBIA Staff.

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