As someone who is provided with a company auto, you appreciate the convenience and dollar savings that this important "perk" provides, but at the same time would like to minimize the tax consequences of your personal use of the auto. Although the most effective dollar-saving strategy would have to take into account your personal and business circumstances, there are three general ways to assure that you will pay the absolute minimum in federal income tax on your usage of a company auto.
First, make sure that business miles aren't misclassified as personal miles. Only your personal miles create fringe benefit compensation income that is subject to tax; your business-connected mileage doesn't count against you. So it's vital that every valid business mile be treated as such, and not be mislabeled as a personal mile.
How can you do this? You can help by keeping a detailed diary or mileage log of each instance of car usage (date, destination, mileage, and business or personal purpose). You also may be able to save big tax dollars with a thorough understanding of the difference between a personal mile and a business-related mile. For example, if you drive in to the office every day in your company auto, the round-trip mileage is personal. However, when you're on temporary assignment to a business location other than the office (for example, you spend several days once in a while at a manufacturing plant instead of the office), the round-trip between your home and the temporary business location is considered business mileage.
Second, make sure you are using the valuation method available to you that produces the lowest amount of fringe benefit compensation income. Finding the valuation method that is most advantageous to you will depend on factors such as the value of the car, the way you use your car, and the ratio of your personal miles to total mileage (business and personal).
Lastly, minimize your personal mileage on the company-provided auto. Obviously, you'll use the company auto to get back and forth to work, and the occasional business trip - after all, that's what your "perk" is there for. However, for those long personal trips where you'll be driving, you will cut your W-2 compensation income by taking the family car instead of the company car.
Planning Note: If during the year you use the auto more than 50 percent of the time for personal purposes, your employer may not be able to deduct the business mileage since employer's depreciation is limited.
Call our offices for an appointment to discuss all the details on how you can enjoy your company-provided auto without winding up with a large tax bill.
IRS Circular 230 Disclosure
Pursuant to U.S. Treasury Department Regulations, information contained in this article is not intended by TOPC Potentia P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.