Providing a company vehicle to your employee might sound like a funny goal to have — but it’s been with me since the beginning of my career. Back during my internship at a Montgomery, AL-based firm in the 1990s, I was delighted to learn of an amazing perk offered by the company to its managers and partners. Upon promotion to the managerial position, an employee became eligible for a company car, and upon reaching the partner status, they would be given a more luxurious ride. All the managers were granted Jeep Cherokees, while the partners were provided Lexus sedans. I was highly impressed by this perk, which I thought was quite cool, and hoped to implement it in my own firm someday.
At that time, I was oblivious to the tax implications, liability risks, insurance procedures, and how such a perk would appear on an employee’s W-2. I only cared about seeing a lineup of Cherokees and Lexus cars in the company’s parking lot.
Today, our clients frequently ask us about the details of offering a company vehicle to their employees, and we have even provided such perks to our own workers. In this blog, I will provide you with an overview of the fundamentals of offering a vehicle to your employee and the tax aspects that you must be aware of. It is crucial to clearly understand these aspects before you start distributing Ferraris among your employees.
What is taxable for employee vehicles? What is not?
Whenever you offer a benefit to your employee, you must assume that a part of it will be subject to taxation. As we all know, the IRS takes a slice of almost everything, right? While this is not the end of the world, it is something you need to keep in mind. When it comes to providing a vehicle to an employee, you have two options: an accountable plan or a non-accountable plan.
Offering an employee vehicle with a non-accountable plan
The answer is simple if you offer the vehicle as part of a non-accountable plan. The car’s cost will be taxable to the employee as compensation at the time it is provided. This is not a desirable scenario as it could result in a substantial tax burden for the employee without any cash to pay for it. Alternatively, you could have the employee purchase the car and provide you with the car note. Then, you could set up a pay item on their regular paycheck to repay them for the note. We did this in the past, and although we paid interest on the vehicle, the interest rates were usually very low. In one instance, the employee received three years of no-interest financing on the car, which was a win-win for everyone.
Offering an employee vehicle with an accountable plan
The other option is to establish an accountable plan. Under an accountable plan, the employee must submit regular business mileage documentation. To the extent that the vehicle is used for business purposes (excluding commuting), the employee will not be taxed on the vehicle provided. However, if the car is used for personal reasons (including commuting), the employee will be taxed on that portion. The downside of an accountable plan is that the company owns the vehicle and must include it in its insurance policy, necessitating the maintenance of all the necessary paperwork. MileIQ is an excellent app that can help you easily track your mileage. The personal use of the vehicle will be taxable and will be included in the employee’s W-2.
Offering an employee vehicle to a shareholder of an S Corp
If the vehicle is offered to a partner who is a more than 2% shareholder of an S Corp, the same taxability concerns arise. If it is an accountable plan, the personal use of the vehicle will be recorded on the partner’s K-1 in a partnership and likely treated as a guaranteed payment. If it is for a 2% shareholder, the personal use amount will be taxable on the shareholder’s W-2.
Final Thoughts
Like always, talk to your tax advisor and your insurance agent about the consequences of providing a vehicle to your employee. In my experience, it can be a really great perk– just know what you are getting into first.
Have questions or concerns about the various benefits you can offer employees? Check out our podcast on the Ideal Benefits for Employees. Ready to talk? We can do that too.
Let’s chat
Topics:
