Deductions & credits

Opus 17 · ‎August 14, 2020

@5acres wrote:

All,

Greatly appreciate the answers to the questions. My Team of sales people will also appreciate the answers, too. If you don't mind, I would like to ask you all the specifics of the generalized questions:

My Sales Team all works from their home (designated home offices) and most, not all, drive company supplied vehicles. The territories they cover are large, between 10 to 15 states. They drive some areas and fly others. They have local sales calls where they are home every night, and weeks that they are gone on Monday and back on Thursday, staying in hotels. Most are seasoned, with 15+ years of experience doing these same jobs. Never have they been charged/taxed or not paid for driving for doing company business.

Our new company CFO stated that there is an IRS policy related to the Average Daily Commute which is being implemented in our place. My sales team is now being docked 50 miles per round trip (25 miles each way) for what was referenced as an IRS regulation. When I couldn't find reference to that rule, I asked the Intuit Community.

So, are you all saying there is "NO" IRS regulation that requires a sales person, who works from a home office, covering the territories as described, to be required to pay the tax on the first 25 miles and the last 25 miles of a trip, because it is considered "the Average Daily Commute"? And the same applies to my sales team who uses a personal vehicle to do the company business, because they are being asked to deduct the first 25 miles and last 25 miles of their trip because it is considered "the Average Daily Commute"?

Thank you all,

If there is a specific regulation or safe harbor that says "25 miles" exactly, I don't know what it is.

You need to start with the proposition that everything you provide an employee as compensation for their services is assumed to be taxable income unless it is covered by a specific fringe benefit rule (like employer-provided health insurance). If you provide your employees with cars to drive, that's considered part of their taxable income, it is not allowed to be a free employee benefit.

Important: If your employees are driving their own cars and submitting reimbursement requests, then nothing that follows applies to you, and we have to start over from scratch with new facts.

Then publication 15-B says that you exclude from taxable income, the use of a car that would have been a deductible business expense if the employee used their own car and submitted a reimbursement request. The exact language is this (page 22):

Vehicle allocation rules. If you provide a car for an em- ployee's use, the amount you can exclude as a working condition benefit is the amount that would be allowable as a deductible business expense if the employee paid for its use. If the employee uses the car for both business and personal use, the value of the working condition benefit is the part determined to be for business use of the vehicle. See Business use of your car under Personal Versus Business Expenses in chapter 1 of Pub. 535.

You don't have to add the value of a vehicle to the employee's taxable income if the vehicle is so specialized (like a police car or tow truck) that it can't really be used for much personal use.

Publication 15-B pages 24-30 goes into great detail about how to value the use of a company car. As a very crude example, if a car would cost $10,000 a year to lease, and the employee can use it half the time for personal use, you have to add $5000 of taxable wages to their W-2.

For another example, if you collect some data and do surveys of your salespeople and find that they drive on average 40,000 miles per year, with 30,000 miles being sales calls, then you would need to add 1/4 of the value of the car to their wages.

What I don't know is whether you need to calculate this per employee or if you can adopt some fleet averages. That would be a question for a CPA.

There is a special commuting rule on page 26. It says that if you adopt the following rules, then you treat the value of the daily commute as $1.50 (one way) and either have your employee reimburse you, or add it to their wages. The rules are:

You require the employee to use the vehicle for bona fide work reasons
You have a written policy that the employee may not use the vehicle for personal reasons except very minor uses (de minimis rule) such as running an errand on the way home.
The employee actually follows the policy and does not use the vehicle for non-business purposes.

There is no rule that the employer must be generous. Suppose the company makes an estimate that the average employee uses their company car 200 miles per week for personal use. That means that either the employee must pay $114 per week to the company for use of the car, or the company must add $114 per week to their W-2 taxable wages. But suppose the employees get together and say "Look, here are our records proving we only drive 50 personal miles per week, so we want you to lower the bill." The employer could, but they don't have to. The employer could say something like "we don't want to be audited so we are basing the amount on a worst case scenario so we are covered." Or any other excuse to set the number the way it is set.

So let me recap all the information so far:

If you provide employees with a company owned car, the value of the car must be included in their taxable wages.
You do not have to include in the employee's wages, business use of the car, as described in chapters 1 and 4 of publication 463. Pub 463 explains the rules for daily transportation to and from work (commuting) as well as local transportation to visit clients and long distance travel.
Commuting is never business use. Traveling locally ("transportation") to visit different clients is business use, and transportation (long enough that an overnight stay is required) to visit clients is business use. See pub 463 chapters 1 and 4 and Figure B.
That means that if the car is only used for business, it does not have to be included in their wages.
But proving it is only used for business will be tricky if audited. Do you require employees to keep mileage records?
If you have a written policy that the car may be used for commuting but no other non-business purpose, the IRS will consider you to meet your obligations if you charge the employee $1.50 per one-way commute (ask for reimbursement from the employee or add it to their W-2 wages).
If you have no restrictions on using the company car for non-business purposes, then you must add the value of the non-business use to the employee's W-2 taxable wages or have the employee reimburse you. You would need a CPA for more specific tax advice on how to best determine the value of the non-business use. One way would be to require the employee to keep a mileage diary and value the non-business use at 57 cents per mile, but there might be other ways.
An employer can be less generous than the IRS allows.

If your CFO is charging sales people 50 miles per week (about $28) for personal use of a company car, that might be a reasonable way to account for taxable personal use, even if "25 mile average daily commute" is not the real justification. If you had a commuting policy that banned employees from personal use except for commuting, you could use the $1.50 per one-way trip amount. But that might also be a big change from prior expectations.

Finally, there is no reason you can't "gross up" your salespeople's salaries to cover the taxes. If your CFO has determined that your employees must pay you $28 per week for their company car (as an after-tax payroll deduction, perhaps) then you could simply increase their salary by $45 per week to cover the repayment plus the taxes on the raise. (There may be other business reasons you can't give a raise, but that's not a tax problem.)

References:

Publication 535 https://www.irs.gov/pub/irs-pdf/p535.pdf

Publication 463 https://www.irs.gov/pub/irs-pdf/p463.pdf

Publication 15-b https://www.irs.gov/pub/irs-pdf/p15b.pdf