Useful steps in calculating car benefit

Companies try to provide cars for their employees to be used for work-related activities and these are considered as car benefit. Most of these companies also allow their employees to keep their cars even on holidays and outside the work hours. Given this situation, it is expected that employees would use the cars for personal or non-work related trips. This set up however is subjected to taxes in accordance with the Federal Tax laws. In order to take a glimpse how it is taxed, this article provides a guide on how it is calculated based on the rules provided by the IRS which includes the cents-per-mile rule, commuting rule, and the annual lease value.

Cents-per-mile rule

  • Cents-per-mile rule is applicable only to cars that are driven in at least 10,000 miles per year. In this mileage requirement, 50% of this should be the distance used for personal use while the other 50% is devoted to work-related travels. This simply means that proper documentation is needed to separate the work-related and personal distances covered by the car per year.
  • Besides the annual mileage requirement, this rule is also limited to cars with values of about $15,000 and $15,200 for trucks or vans. This value requirement was based on the rules of 2009 as set by the IRS.
  • The amount that needs to be paid by an employee for the personal use of the car is calculated by multiplying the total miles used for personal trips with the mileage rate of the year set by the IRS. The mileage rate in 2010 according to IRS is $0.50 per mile which is the amount that covers the maintenance of the vehicle and its insurance. For example, an employee’s personal use of the car reached 5000 miles and is then multiplied to the $0.50 set by IRS this gives $2500. This amount should be reimbursed to the employer or it would simply be deducted from the salary of the employee.

Commuting rule

  • The calculation involved in this rule is based on the number of work-related trips that the employee is taking within a year. This rule is reserved only for work related trips and does not allow the car to be used for personal purposes. The benefit under this rule is calculated by multiplying the total number of one-way trips that the employee makes in a single year by the mileage rate set by the IRS for this rule in a specific year. The mileage rate set by IRS for this rule in 2010 is $1.50.
  • The commuting rule set by the IRS in 2010 is only offered to employees or board members who are paid higher than $195,000. This simply means that employees below the income level set are not qualified for this rule.

Annual lease value

  • The tax collected by the IRS under this rule is based on the tax amount of the car when it is offered for lease. This value is based on a specific table provided by the IRS. In order to calculate this, the employee needs to check the Fair Market Value (FMV) of the company car and compare this to the table form the IRS.
  • The percentage of miles used for business purposes and the percentage of miles used for personal use of the employee are also calculated. The calculation should also include the amount of fuel that the employee has purchased if applicable. The employee’s personal car use is then reported to the IRS using a specified form.

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