How Are Fleet Programs Taxed?

How are company cars taxed? Find out more about fleet programs, and how they compare to vehicle reimbursement options.

Introduction

A company car as part of a fleet program can seem like a significant benefit for employees. But, this car must only be used for work purposes, otherwise travel using this vehicle is subject to tax —which can make it feel like less of a perk for employees. 

The rules surrounding personal use and business use of a company car are complex, and it’s important to have a thorough understanding of how they work to ensure compliance. This makes sure that the company car is being taxed properly, and that business use is properly separated from personal use. Companies typically use personal use chargebacks to help compensate for using a company car for personal reasons, which can make managing these fleet programs more complex.

It’s important for companies to look into the tax implications of a fleet program, and consider alternative options to ensure that it’s the right fit for the business. This can help to both promote compliance while also ensuring that business decisions come from an informed perspective. 

How Do Company Cars Work?

Whether it’s part of an overall benefits package or simply to help facilitate employees driving for work, a company car is often a significant perk given to employees. A set of company cars is often referred to as a fleet, and companies can choose to either lease or purchase these vehicles.

In a fleet program, the company is responsible for all vehicle expenses. Additionally, the company assumes all insurance risk associated with driving the company vehicles. This includes when employees are using their company car off-the-clock — companies are liable for all travel using that vehicle.

How Are Company Cars Taxed?

If you’re providing your employees with a company car as part of a fleet program, it’s essential to be aware of the associated tax implications — both for business and for your employees.

If the vehicle is used exclusively for business purposes, it is not considered to be a taxable benefit. This is only true provided that the employee properly documents all business trips made using the company car to verify that it was used for exclusively business travel. 

When there’s personal use involved, there’s tax involved. When an employee uses the company car for personal reasons, the IRS will consider this a fringe benefit, and tax it accordingly as part of an employee’s income. The IRS taxes the personal use of any business vehicle, and it’s required that employees track and report all personal use of a company car to the IRS. This is an essential part of compliance with IRS regulations. 

If your company has a fleet program, it’s essential to be aware of the current IRS guidelines to ensure compliance with the associated tax laws. It’s up to employees and employers to stay up-to-date on any changes, and to keep the required records to verify business and personal travel.

What Are Personal Use Chargebacks?

With a fleet program, personal use chargedbacks are when an employer charges employees an amount to compensate for personal use of the company car. This amount could be either a fixed monthly amount, or a cents-per-mile amount. Personal use chargebacks are used by an employer to compensate for the associated costs, which can include gas, depreciation, maintenance, and more. 

A key part of any company car program is separating business use from personal use. In order to do this, it’s also essential to understand the difference between these two uses, according to the IRS. Personal use occurs when that company vehicle is used for anything that isn’t strictly work-related. This can include running personal errands, trips during the weekend or for a vacation, and any other trips using the company car that aren’t related to business purposes. Additionally, when the company car is used by a non-employee, it’s also considered as personal use. 

It’s important to note that commuting is also considered to be personal use, according to the IRS. That means that using a company car to drive from the home to your home is considered to be personal use of that vehicle, and therefore subject to tax. Just as other personal travel, these trips made using a company car must be tracked and recorded for compliance.

The Challenges of Fleet Programs

Managing a fleet program can be time-consuming and challenging. Ensuring that personal use of a company car is properly tracked and quantified can be difficult, as is managing and coordinating a personal use chargeback program. Additionally, personal use chargebacks can detract from the value of a company car for many employees, making it feel like a less strong company perk than it is. Beyond the management required in a fleet program, they typically have high associated costs for companies. 

With these challenges, it’s worthwhile to consider another option for businesses — vehicle reimbursement programs — to see if they could be a better fit for your company. If your business doesn’t require specialized vehicles or need to transport specialized cargo to perform tasks, a vehicle reimbursement program could be a better fit. 

Another Option: Vehicle Reimbursement Programs

Vehicle reimbursement programs are a completely different approach to employee travel than company cars. In a vehicle reimbursement program, employees use their own personal cars for work travel, and their expenses are reimbursed to them by the company. With a vehicle reimbursement program, there is no longer a need for personal use chargebacks. Instead, business miles are tracked and calculated, which can simplify processes, increase flexibility, and promote efficiency compared to a fleet program. 

When following IRS rules and guidelines, these reimbursements are able to be provided tax-free. These rules vary depending on the program, but include keeping detailed mileage logs for all business travel to justify business expenses. With a vehicle reimbursement program, there is no longer a need for personal use chargebacks. Instead, business miles are tracked and calculated, which can simplify processes, increase flexibility, and promote efficiency compared to a fleet program. 

Additionally, companies aren’t burdened with having to source and maintain vehicles. This can also promote greater scalability as a company grows, as employees bring a vehicle along with them, rather than the company having to acquire and store vehicles.

The most common vehicle reimbursement programs are Fixed and Variable Rate (FAVR) programs, Cents per Mile programs, and Tax-Free Car Allowance. Among these, a FAVR program is a strong and robust option that’s a fit for many companies with multiple vehicles that might otherwise use a fleet program. FAVR programs account for a range of expenses that employees could spend on work travel, including gas, depreciation, maintenance, insurance payments, and more. FAVR also accounts for geographic differences, making it a great candidate for a vehicle reimbursement program for companies with employees who drive for work purposes in multiple states. 

Additionally, powerful tools exist for vehicle reimbursement programs that can help to streamline processes even more. For example, Cardata offers a GPS-powered mileage tracking app for drivers to help promote accuracy, alongside software tools for administrators to manage business mileage, ensure compliance, and more. Tech-powered tools like this can help companies maintain compliance and foster a strong, robust vehicle reimbursement program. 

Conclusion

When an employee uses a company car to run their own errands, commute, or one of the many other types of personal travel, this personal use is subject to tax. The IRS views these personal trips as a fringe benefit, and taxes them as a result. In turn, companies will charge personal use chargebacks to employees to help compensate for this. These complexities can make administering a fleet vehicle program a challenge, taking substantial time and energy that could be otherwise directed towards core business activities. 

A fleet program isn’t the only way for your employees to drive for work — they can also travel for work using their personal vehicles. These expenses can be reimbursed using a vehicle reimbursement program, and it’s best practice to consider all options available so you can make informed decisions about what’s best for your business. Whether it’s a fleet of company cars or a vehicle reimbursement program, it’s essential that your program is compliant with the most up-to-date and accurate legislation.

Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants nor agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.

Sources

IRS: https://www.irsvideos.gov/Business/FilingPayingTaxes/EmployerProvidedVehicles

IRS: Pub 15B: https://www.irs.gov/pub/irs-pdf/p15b.pdf