By Mike Antich
Personal use of company-provided vehicles is a common industry practice, with approximately 87 percent of fleets allowing it. From the perspective of the Internal Revenue Service (IRS), personal use of a company-provided vehicle is a taxable fringe benefit. As such, specific recordkeeping and reporting are required to be in compliance, as defined in IRS Publications 15-B and 463.
Personal use administration is a headache for most fleet managers. Oftentimes, this headache is self-induced and avoidable. Here are five common mistakes committed by fleets in administrating a personal use program.
1. Unclear Personal Use Policy. The root cause of many problems is not having a personal use policy fully understood by drivers. "A well-run personal use program starts with a good policy that clearly defines and explains the program," said Ed Iannuzzi, manager, client support services for Automotive Resources International (ARI). Iannuzzi manages ARI's personal use program. "It provides examples of what constitutes personal use and defines the employee's recordkeeping and reporting requirements," said Iannuzzi. "A personal use policy should clearly define what personal use is allowable, including who can drive the company car, such as employee only, employee's spouse, or other. Give examples of what constitutes personal use, such as daily commute to and from principal place of business, etc."
2. Inadequate Internal Audit Procedures. Most personal use problems revolve around non-compliance. To minimize this, a corporate policy should clearly define employee recordkeeping responsibilities and the requirement to submit business and personal miles on a monthly or quarterly basis. "Clearly state what will happen if an employee does not comply with reporting business and personal mileage," said Bill Holmes, tax manager for ARI. "Clearly advise these records must be provided to the employer upon request for either an internal or external audit."
Some drivers report driving zero personal use miles. It is important to have an internal audit procedure to review drivers with not only very low, but also very high personal use percentages. One common remedy companies use when drivers don't report personal use mileage is to charge 100 percent of the IRS Annual Lease Value as personal use for that period. This practice protects the company by imputing the maximum taxable benefit to the employee. As long as employees report the mileage for any unreported period prior to year-end, they can negate this penalty. If the employee does not report mileage and is subjected to a penalty, they may be able to claim a business deduction on their personal income tax return for the business use portion of the penalty portion of the imputed income, so long as they have maintained adequate mileage records.
3. Incorrect Use of the "Commute Rule" for Home Offices. Often employees working from home offices report very little personal miles, arguing the majority of vehicle use is from their "office" to a customer, a job site, or other business location. Personal use for employees who work from their home is complicated because of the confusion over whether the first and last trip of the day is considered a business use trip or personal use. The IRS says commuting to work is personal use, not business use. Some employees working from a home office believe they are on a business trip anytime they leave their homes. But that's not how it is defined in IRS regulations. Unless a home is the "primary place of business," the first trip of the day is going to work, not leaving work. For a typical sales rep, the primary place of business is the client's office. Therefore, the first and last trips are personal use. "A well-written personal use policy, with examples, will help minimize this confusion by field employees," said Iannuzzi.
4. Unprepared for Audits. The IRS requires an employer to impute income to employees for the personal use of a company-provided vehicle. The income imputed to the employee is subject to all federal, state, and local payroll taxes. "In an audit situation, the auditor will request supporting documentation to verify that the employer is reporting imputed income properly," said Holmes. "Remember that most audits will take place two to three years or longer after the event has taken place. Common sense will tell you that you are in a better position to address an audit if you have supporting data on hand rather than having to go back and try to reconstruct it."
5. Not Maintaining Employer Recordkeeping When Employees are Charged for Personal Use. Some employers believe a monthly personal use charge to the employee eliminates the employer's recordkeeping requirements. "Nothing could be further from the truth," said Holmes. "The monthly charge to the employee does not eliminate the IRS imputed income calculation requirement for personal use of a company car. Full documentation and compliance with the law is still required since the net amount (if any) is reportable income and subject to employment taxes."
The Fleet Manager's Responsibility
A personal use policy must comply with all federal tax requirements. This requires employees to report vehicle usage and employers to properly impute income to an employee for personal use of the company-provided vehicle and comply with payroll tax requirements. A fleet manager is an integral component in protecting the company from tax problems related to personal use. Avoiding these five mistakes will help a fleet manager fulfill this responsibility.
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