The Internal Revenue Service counts fringe benefits—goods, services, and experiences given to employees in addition to wages—as a form of compensation. In most cases, using your company car for personal use is considered a taxable fringe benefit, and if your small business pays you a salary, you will owe tax on that benefit.
Personal vs. Business Use
Using a company car for business is not a fringe benefit while the personal use is taxable. Personal use of a company car includes commuting to and from work, running errands or allowing a family member who is not a company employee to use the vehicle.
If an employee does not keep track of mileage, separating business and personal use, then all of the use of the company car is taxable. If a mileage record is kept and provided to employer, then the value of the personal use is considered taxable. For shareholders/employees of S corporations, they need to keep track of the personal use. Many times in this situation they are the employee and employer. The benefit would be calculated and then added to the compensation for the year for W2 purposes.
There are three calculations to choose: the automobile lease valuation rule, the cents per mile rule or the commuting rule. For a leased vehicle, use the automobile lease valuation rule. Determine the fair market value of the vehicle on the first day an employee uses it for personal purposes. Look up the annuals lease value in IRS publication 15-B. Multiply the annual lease value by the percentage of personal use (based on mileage record). An additional 5.5 cents per mile should be added if your company provides fuel. If the employee pays for fuel, multiply each mile by 54 cents. By the commuting rule, each direction of an employee’s commute using a business vehicle is considered $1.50 in wages.
A small amount of personal use of a company car is not considered a fringe benefit. Brief detours while on company business, such as picking up lunch, is allowed as a business use. Additionally, occasional commuting in a company vehicle, such as being caught in a traffic jam until after the office closes and having to drive the company car home, is not counted as a fringe benefit.