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University of Massachusetts Amherst

Family Business Center

Baby You Can Drive My (Company) Car

By Shel Horowitz

Just in time for the summer cruising season, the June gathering at the Log Cabin featured advice on company cars, from accountant Jennifer Reynolds of FBC sponsor Meyers Brothers Kalicka, P.C.

Yes, employees can use a company vehicle—with limitations.

Two different options are allowed: accountable and non-accountable plans.

In an accountable plan,

Employees have to keep a mileage log, with times and destinations as well as miles (failure to maintain the log throws the vehicle back into the non-accountable classification, which means the employee pays taxes on the personal and business use)

Business use  is not considered income to the employee

The employer can deduct 100% of acquisition cost, as well as 100%  of all the expenses for that vehicle

For non-accountable plans, on the other hand, the employer can still deduct the cost, but the employee is taxed on the benefit: the value of access to the car is considered income, whether it's being used for business or personal reasons. However, the employee doesn’t have to keep a log.

Do employees really benefit under a non-accountable plan? Yes, actually; generally speaking, the taxes incurred using the vehicle are going to be a far smaller wallet hit than the actual costs of obtaining and driving a vehicle.  But it is more advantageous to maintain an accountable plan, where the employee is taxed only on personal use.

Of course, there are also systems in place to reimburse employees who use their own cars on company business. You can increase the employee's salary or provide a flat reimbursement regardless of actual expenses (but include the reimbursement in the employee’s taxable wages)…reimburse for miles driven, up to the standard IRS-approved rate (50.5 cents, at the moment, increasing to 58.5 cents starting July 1 through December 31, 2008) for each business mile…or use the more complex FAVR (Fixed And Variable Reimbursement) method. Some good news: employers don't have to use the same system for all employees.

Now that you've got that straight, there's the issue of whether the car is a "luxury auto" for tax purposes. Despite all the talk of carbon footprints and fuel economy lately, the tax code actually encourages the purchase of monster SUVs—because anything over 6000 pounds of gross vehicle weight is exempt from the luxury auto depreciation restriction that applies to smaller vehicles. Sigh!

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