Vehicles - Methods of Business Treatment

There are several acceptable methods for the deduction of vehicles.  Here is a quick look at a the most acceptable methods. 

Company Owned or Leased Vehicles - Actual Expense Method

1.    The business entity has title or is named on the lease document and officially carries the insurance in the entity name.
2.    The entity pays the expenses - fuel, repairs, insurance, license, etc.
3.    The entity depreciates the vehicle if owned, or expenses the lease payments.
4.    The employee using the vehicle maintains an adequate log to document an prove the portion of business use.
5.    The employee annually reports the total miles driven, the business miles, the commuting miles, and other personal miles.  This information is required to be reported on an IRS tax schedule of depreciation, Form 4562.
6.    Based upon the above % of personal use indicated by the miles reported, the entity is required to charge the employee for personal use.  If it is a company owned vehicle, we refer a IRS schedule of annual lease value (ALV).  For example, this schedule reports that the ALV of a $45,000 vehicle is $11,750.  If the vehicle were used 100% for personal use, the employee would owe the entity $11,750.  If the personal use amounted to 20%, the employee should be charged $2,350.  The ALV does not cover gas, therefore an additional 5.5 cents per mile is assessed if the entity pays the fuel cost.
7.    The above assessment can be included in the W2 as taxable wages (an equal amount is removed from vehicle expense and classified as wages).  Alternatively, the employee can remit a check to cover the personal use.

Employee Owned Vehicles Used for Business - Reimbursement Method

1.    In this case the employee personally owns or leases the vehicle and pays all the bills.
2.    The employee keeps track of business miles and submits that to the entity for reimbursement.  It might be a monthly policy, quarterly, or annually.
3.    The IRS annually publishes a mileage reimbursement rate.  If a business reimburses at that rate or lower, the business can deduct the amount as a business expense and the reimbursement is not taxable to the employee.  If the IRS rate is exceeded, the excess is deductible by the entity as W2 compensation.  The 2007 rate is 48.5 cents per mile.  The 2008 rate is 50.5 cents per mile.

Commingled Method

1.    Although not advisable, and subject to IRS challenge and disallowance, some businesses allow the employee to title the vehicle or lease personally, then treat it for accounting purposes as if the business owns the vehicle.  Technically, a business is not supposed to depreciate a vehicle it does not own.
2.    Technically, the IRS could take the position that you have an employee owned vehicle and disallow actual expenses and substitute the mileage reimbursement.
3.    From recent experience, we note the IRS, in certain cases accept this method, but it is not guaranteed.
4.    If you wish to chance this method, it would seem to make sense to have some corporate authorization or legal arrangement documenting the method.  For example, a legal assignment?