Employer-provided and company-owned vehicles.

• Author: Hackett, Trenda B.

This case study has been adapted from Checkpoint Tax Planning and Advisory Guide's Closely Held C Corporations topic. Published by Thomson Reuters, Carrollton, Texas, 2022 (800-431-9025; tax.thomsonreuters.com).

Employees generally must include in income the fair market value (FMV) of their personal use (including commuting) of an employer-provided auto (Regs. Sec. 1.61-21(a)(1)). The value of this fringe benefit can be determined under either a general or special valuation rule (assuming the requirements are met), as explained later in this discussion.

If the personal use of an employer-provided auto is de minimis, or if the employee pays fair value for the personal use, the employee will recognize no income (Regs. Secs. 1.132-6 and 1.61-21(b)). Under Sec. 132, a de minimis fringe benefit is one that has such a small value that accounting for it would be impractical. In addition, Regs. Sec. 1.132-6(e)(2) provides that commuting use of an employer-provided auto more than one day a month is not de minimis.

One frequently contested issue regarding a shareholder/employee's personal use of an employer-provided automobile is the treatment of personal use as compensation (which is deductible by the C corporation) versus treatment as a constructive dividend (which is not deductible). The compensatory nature of the personal use of an auto should be well documented in the corporate minutes if the corporation wants to deduct the auto expenses.

Tax treatment of employer

An employer is not allowed an income tax deduction for any expense incurred, or any payment or reimbursement, for providing transportation to an employee in connection with travel between the employee's residence and principal place of employment, except as necessary for ensuring the safety of the employee when unsafe conditions, as described in Regs. Sec. 1.61-21(k)(5), exist for the employee (Sec. 274(1)(1); Regs. Sec. 1.274-14(b)). The final regulations are silent on the employer's deduction of the expenses for operating a vehicle that has some personal use, even if the personal use portion is minimal. Additional guidance on whether any amount of commuting use can be disregarded as de minimis would be welcome. In the interim, employers that allow the personal use of an auto that includes some commuting use should consider allocating a portion of the vehicle's operating expenses to that personal use and not deduct those costs.

Taxing an employee's personal use

Under the general...