Thinking about using a company car? Learn the IRS rules for personal and business use, how to value the benefit, and avoid unexpected tax liability.
A company car can be a valuable perk — helping employees perform their duties and project a professional image. However, the tax treatment of company vehicles isn’t as simple as handing over the keys. The IRS views the personal use of an employer-provided car as a taxable fringe benefit, meaning it must be properly valued and reported.
When handled incorrectly, misuse or misreporting can lead to payroll issues, inaccurate W-2s, and unexpected tax liabilities for both the employee and employer. Understanding the company car tax rules ensures compliance and prevents costly surprises.
Personal Use vs. Business Use
The IRS distinguishes between business use and personal use of a company car:
- Business use includes driving to client meetings, making deliveries, or traveling between work sites.
- Personal use includes commuting, running errands, or using the vehicle for non-business trips.
Even commuting — the daily drive between home and work — counts as personal use unless it meets specific exceptions.
To stay compliant, maintaining detailed mileage logs is critical. The log should record the date, destination, purpose of the trip, and miles driven. Apps or GPS-based tools can help automate this process. Without sufficient records, the IRS may classify all use as personal, leading to higher taxable income.
Methods to Calculate Taxable Benefit for Personal Use
The IRS allows several methods to determine the fair market value (FMV) of a company car’s personal use. Employers can choose the one that best suits their circumstances, as long as it’s applied consistently and meets the required conditions.
1. General Valuation Rule
This method values the benefit based on the FMV of a comparable leased vehicle under similar conditions. Employers determine what it would cost an employee to lease the same car on the open market, then prorate the cost for personal use.
This approach is flexible but may require more documentation and market research.
2. Cents-Per-Mile Rule
Employers can multiply the IRS standard mileage rate by the number of personal miles driven.
For 2024, the standard mileage rate is approximately 67 cents per mile.
To qualify:
- The vehicle must be regularly used in business or driven at least 10,000 miles annually.
- The car’s FMV cannot exceed a certain IRS-set limit at the time of first availability.
3. Lease Value Rule (Annual Lease Value Method)
The Annual Lease Value (ALV) is derived from IRS tables in Publication 15-B. It’s based on the car’s FMV when first provided to the employee.
The ALV represents a yearly value that’s then prorated for personal use. For instance, if an employee uses the car 20% of the time for personal reasons, they’re taxed on 20% of the ALV.
4. Commuting Valuation Rule
If an employer restricts the car’s use strictly to commuting, they can use a simplified rate of $1.50 per one-way commute.
This option is only valid if:
- The employer requires the employee to commute in the car for bona fide business reasons.
- There’s a written policy prohibiting other personal use.
Tax Reporting and Withholding Requirements
Personal use of a company vehicle is treated as a non-cash fringe benefit. The value of the benefit must be included in the employee’s Form W-2 and is subject to:
- Income tax withholding
- Social Security
- Medicare
Employers can choose to withhold tax during each pay period or at year-end. It’s also permissible to gross up the benefit — covering the taxes on behalf of the employee.
Key IRS Forms and References
- Form W-2: Includes the taxable benefit under “Wages, tips, other compensation.”
- IRS Publication 15-B: The definitive guide to fringe benefit taxation, including company car rules.
Exemptions and Exclusions
Certain uses or vehicles may qualify for exemption:
- De minimis fringe benefits — occasional, minimal personal use (e.g., short local trips) may be excluded.
- Qualified nonpersonal use vehicles — such as delivery trucks or police cruisers, used exclusively for business.
- Demonstration vehicles — for car dealerships under specific IRS criteria.
IRS Rules & Limits to Be Aware Of
IRS Publication 15-B
This publication outlines acceptable valuation methods and rules for fringe benefits. It explains when the cents-per-mile, lease value, or commuting rule can be applied and how to document each.
Fair Market Value (FMV) Considerations
FMV reflects the cost to lease or buy the vehicle in the open market — not the employer’s cost. Using FMV ensures accurate and defensible calculations in case of an audit.
Mileage Rules & Depreciation
If an employer or employee has already claimed depreciation deductions under Section 179 or the actual expense method, they may not be eligible to use the standard mileage rate for the same vehicle.
The IRS standard mileage rate is updated annually, factoring in fuel, maintenance, insurance, and depreciation.
Best Practices to Manage Company Car Tax Exposure
To minimize audit risks and maintain compliance:
- Keep comprehensive mileage logs.
Record all trips, including date, purpose, and mileage split between personal and business use. - Establish a clear company car policy.
Define rules for commuting, personal errands, and overnight use. Employees should sign an acknowledgment form. - Choose the right valuation method.
Evaluate which method (mileage, ALV, or FMV) aligns best with your company’s operations. - Review usage periodically.
Reassess the benefit value annually or whenever a vehicle is replaced or reassigned. - Coordinate with payroll and accounting.
Ensure the taxable value of personal use is reported on time and included in payroll calculations. - Consult your CPA.
Tax regulations evolve, and IRS updates can affect vehicle benefit calculations. Partnering with a tax professional ensures ongoing compliance.
Conclusion
A company car is a valuable tool — but it comes with specific IRS rules that both employers and employees must follow. Proper tracking, valuation, and documentation help you stay compliant and avoid costly penalties.
At Rise CPA & Accountants, we specialize in guiding businesses through complex fringe benefit rules and payroll compliance. Whether you manage a small fleet or a single company vehicle, our experts can help you set up the right systems for accurate reporting and tax efficiency.
Ready to Simplify Company Car Tax Compliance?
Schedule Your Free Consultation with Rise CPA & Accountants today. Or, Explore Our Accounting Services to discover how we can streamline payroll, tax reporting, and compliance for your business.
