When a company supplies employees with a company automobile, you appreciate the convenience and dollar savings, but remember, this perk has tax implications for the personal use of the automobile. The personal use of a company auto must be treated as non-cash fringe benefit income that is subject to income and social security taxes.
Before you put too many miles on your company car, start thinking of ways to minimize the tax consequences of your personal use of the auto. There are three general ways to assure that you will pay the absolute minimum in federal income tax on your usage of a company auto.
First, make sure that business miles are not misclassified as personal miles. Your personal miles create fringe benefit compensation income that is subject to tax, while your business-connected mileage does not. Therefore, it is vital that every valid business mile be treated as such, and not mislabeled as a personal mile. Keep a detailed diary or mileage log of each instance of car usage (date, destination, mileage and business or personal purpose).
Second, make sure you are using the valuation method available to you that produces the lowest amount of fringe benefit compensation income. Fortunately, the tax rules give you some flexibility in valuing the personal use of your company car. Finding the valuation method that is most advantageous to you will depend on factors, such as the value of the car, the way you use your car, and the ratio of your personal miles to total mileage (business versus personal).
Lastly, minimize your personal mileage on the employer-provided auto. Obviously, you will use the company auto to commute to and from work and for the occasional business trip. After all, that is why you have your perk. However, for those long personal trips, you will cut your W-2 compensation income by taking the family car instead of the company car.
Contact contact Henssler Financial at 770-429-9166 or at [email protected] if you have any questions, or to discuss all the details for how you can enjoy your company auto without winding up with a large tax bill.