Reporting Requirements
It’s important to know what constitutes personal use of a company car and how to report it to the IRS. Generally, business-related car expenses are deductible on a company tax return, but using the car for personal reasons is not. The IRS rules state that personal use of a company car must be reported on an individual’s tax return, regardless of whether the driver is an employee or not. So if a company car is driven for both business and personal purposes, it is important to accurately report the personal use of the car on the individual’s tax return.
Deduction Limitations
The IRS puts a limit on how much an employee can deduct for their personal use of a company car. The limit is based on the national rate for a particular year. For example, in 2020, the maximum allowed rate per mile was 57.5 cents. So if an employee drives a company car for personal reasons, they can only deduct a portion of that cost on their tax return.
Gross Income Taxation
If an employee drives a company car for personal reasons, the IRS requires that the company report the personal use of the car on the employee’s W-2 form. This is referred to as “gross income taxation” and is an important part of reporting the personal use of a company car. The employee’s gross income will be taxed based on the number of miles driven for personal use. The company must report these miles to the IRS on the employee’s W-2 form.
Fair Market Value
The company also must report the fair market value (FMV) of the car when it is used for personal reasons. The FMV is calculated by multiplying the total number of miles driven for personal use by the IRS national rate for the particular year. For instance, if an employee drove a company car for 500 miles for personal use in 2020, theFMV would be 287.50 dollars ((500 miles X 58.5 cents) per mile). The employer must report this amount to the IRS on the employee’s W-2 form.
Completion of Form 2106
In addition to the above, the company must complete Form 2106 when reporting the personal use of a company car. Form 2106 is used to document the FMV of the car when used for personal purposes as well as any other associated mileage, costs and expenses. The form also must include the business purpose for each use of the car, the date it was used, and the total miles driven.
Reporting to the IRS
Once Form 2106 is completed, the company must file it with the IRS. The company should also provide a copy of the form to the employee, who should then include it in their own tax return. This will ensure that the proper deductions are taken when reporting the personal use of a company car.
Penalties for Non-Compliance
Failure to report the personal use of a company car can lead to penalties from the IRS. The penalties can include fines, interest and even criminal prosecution. It’s important to understand the IRS rules regarding the use of company cars and to take all the necessary steps to ensure compliance.
Monitoring Usage
One of the key components of accuratelyreporting the personal use of a company car is monitoring its use. Companies should have a system in place to track when and how the vehicle is beingused. This can include installing monitoring devices such as GPS trackers and having regular audits. This will help ensure that any personal use of the car is accurately reported.
Mileage Reimbursement
Another way to accurately report the personal use of a company car is to offer mileage reimbursement to employees. This is when an employee is reimbursed for mileage driven for personal use. The employee can then report the reimbursement on their tax return as a deduction. The company will also need to report this reimbursement to the IRS on Form 2106.
Business-Only Purposes
It’s always best practice to limit the use of a company vehicle to business-only purposes. This will help to ensure that the company and employees are in compliance with IRS rules and limit their exposure to penalties. Companies should have clear policies in place regarding the acceptable use of a company car and should enforce those policies.
Conclusion
Reporting the personal use of a company car is an important component of a company’s tax reporting process. It’s important to understand the IRS rules regarding the use of company cars and to ensure that all necessary steps are taken to ensure compliance. Proper monitoring, reimbursement programs and enforcing policies can all help to ensure accurate reporting.
