Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company1 What is it? Company cars or plans that reimburse expenses for use of personal cars are not employee benefits as such since purpose is not to compensate employee Employer’s policy regarding business use of cars is often regarded as part of the employer’s fringe benefit package

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company2 Possible Arrangements Business Use of Cars –Company car –Reimbursement plan –No plan Note, for self-employed, all business related car expenses are tax deductible

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company3 Company Car - When is it Indicated? When employees use a car substantially for business or commuting Fringe benefit for selected executives

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company4 Company Car Advantages 1.A company car can maximize tax benefits for an employee 2.Company retains maximum control over cars used by employees

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company5 Company Car Disadvantages 1.Company bears capital investment costs of car ownership 2.Substantial administrative costs

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company6 Company Car - Tax Treatment of Employer As car owner, employer entitled to deductions for depreciation and expenses Under employer reporting, employer can either: -report entire value of car availability on employee W-2; -determine and report only personal/commuting use -report only commuting use not reimbursed by employee

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company7 Company Car - Tax Treatment of Employer Valuation of car availability Taxable value of car to employee is amount an unrelated 3 rd party would charge for use in arms-length transaction or employer can elect one of three special valuation rules: 1. lease value from IRS tables 2. mileage rate of $0.51 / mile (2011) if certain requirements met 3. commuting valuation rule of $3 per round trip ($1.50 per one- way)

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company8 Company Car - Tax Treatment of Employee Providing employee a car for business purposes is a “working condition fringe”; value is excluded from income If car used for commuting or personal purposes, prorated amount is included in employee income If employee pays for business use of car, can deduct as miscellaneous itemized deduction

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company9 Company Car - Tax Treatment of Employee Employee recordkeeping If car used for business and personal needs, employee must substantiate business use unless Company has written policy of no personal use (except commuting) Employee is not a control employee Employer reports commuting value to extent no reimbrsed by employer Employee requires for business reasons to travel to or from work in vehicle

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company10 Reimbursement Plans and “No Plans” 1.Accountable plan - employee must account for expenses to employer return excess reimbursement 2.Nonaccountable plan - employee doesn’t account for expenses or employee keeps excess reimbursements

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company11 Reimbursement Plans and “No Plans” 3.No plan –employer does not directly reimburse –employee responsible for paying expenses –employee entitled to any deduction for expenses

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company12 Reporting W-2 reporting by employer in certain situations Employee determines deductible amount (Form 2106 or Form EZ) and claims as miscellaneous itemized deduction to extent exceed 2% employee adjusted gross income Self-employed compute and enter car expense on Schedule C, no 2% of adjusted gross income limitations

Company Car or Reimbursement Plan Chapter 53 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company13 Discussion Questions 1.What types of “getting to work” trips are business expenses rather than commuting expenses? 2.Why is it advantageous for a car to be used more than 50% of the time for business rather than 50% or less? 3.When is it advantageous to use the standard mileage rate rather than exact expenses?