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Fixed and Variable Rate Automobile Allowances

In lieu of submitting extensive records documenting actual expenses, IRS rules provide two methods for reimbursing employees for business use of their personally owned automobiles with significantly reduced record keeping requirements.

Reimbursements made on the basis of either a fixed mileage allowance or a fixed and variable rate (FAVR) allowance, require substantiation only of the business purpose, time, and place of the vehicle use. The amount of expenses incurred is deemed substantiated, provided the allowances meet certain limitations and requirements.

The value of an employees' personal use of a company car is includable in the worker's gross income unless it can be excluded as a de minimis benefit or a qualified non-personal use vehicle. Employers may decide whether or not to withhold income tax on value of employee's personal use of a company car. Employers electing not to withhold must notify the affected employee of that decision and include fair market value of the benefit on the employee's Form W-2. Employers must withhold Social Security taxes and pay FICA and FUTA taxes on the value of personal use. Those employers electing to withhold income and employment taxes may treat the value of the personal use of a company car as paid on a pay period (on a quarterly, semi-annual, or annual basis). The general withholding methods and deposit rules for taxable fringe benefits apply.
An employer can determine the value of a worker's personal use of a company car by using one of several valuation rules established by the IRS. For example, under the general valuation rule, the personal use value of a vehicle is the fair market value of its availability - that is, the amount a worker would pay to lease the car. Several optional valuation rules also are set forth in IRS regulations. These include:
Annual Lease Valuation Rule - An automobile made available to employees for an entire calendar year may be valued according to the IRS's annual lease value table, which provides lease values based on a car's fair market value. Employers can use several methods to determine a car's fair market value.
Cents per Mile Rule - Under this option, employees' personal use may be valued by multiplying the number of personal miles driven by the standard mileage rate.
Commuting Valuation Rule - Where the employer prohibits personal use of a company car except for commuting, the value that constitutes taxable wages is $1.50 per one-way commute, per employee.

Last updated: 03-04

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