The Tax Attic with Jerry Coon — February 25, 2010

Non-taxable fringe benefit disappearing

 

Jerry Coon, Enrolled Agent

A non-taxable fringe benefit that appears to be disappearing is the employer-provided vehicle. This type of fringe benefit is called a Working Condition Fringe. It is non-taxable to the employee, because the expense is a deductible business expense whether the employee or the employer is paying for the auto.

For example, General Motors supplies a vehicle to its Grand Rapids regional marketing director. This is a deductible business expense for General Motors on their corporate tax return or, if the director was using his personal auto in his capacity as a General Motors employee, the expenses would be deductible on his personal 1040. Because the company is supplying the auto, the expenses are considered non-taxable to the director. It’s a legitimate Working Condition Fringe. As long as there is no element of personal usage by the director, none of the expenses of the auto will be taxable to him. However, if there is an element of personal usage, there will be some taxable income allocated to the director.

Just what constitutes an “element of personal usage”? The most common element of personal usage occurs when the employee has 24-hour access to the auto, personal use of the auto is not specifically forbidden by the employer, and the employee does incur some personal usage of the auto.

In the example above, because the director is expected to visit dealerships and attend various conferences which entail many overnight stays, General Motors assigns to the director a vehicle for his exclusive 24-hour use. General Motors does not forbid him from using the auto for personal use and he does use the auto occasionally to run personal errands. There will be some taxable income allocated to the director in this case.

Last year, he put 30,000 total miles on the auto. Of this total, 4,500 miles, or 15%, were for personal use. It cost General Motors $15,000 to operate his vehicle for the year. Without any personal usage, this would all be considered a Working Condition Fringe benefit and non-taxable to the director. However, we have to deal with those 4,500 personal miles.

General Motors has a variety of methods it can use to calculate the taxable amount of the personal usage. First, it can require the director to reimburse General Motors at the prevailing federal rate for mileage reimbursements: 55 cents per mile. The director would have $2,475 (4,500 times .55) withheld from his paychecks and that would be the end of this story.

Second, General Motors could include 15% (4,500 miles divided by 30,000 miles) of the total Working Condition Fringe value of $15,000 in his W-2 (15% of $15,000 is $2,250). This would be considered taxable income to the director and he would pay tax on this amount.

Third, General Motors could include 100% of the Working Condition Fringe value of $15,000 in the taxable income of the director. The director would then use Form 2106, Employee Business Deductions, to deduct the 85% business portion of the expenses, or $12,750, on his personal tax return. Fortunately, we very infrequently see this third option used. These expenses claimed on Form 2106 are deducted on the Schedule A of the taxpayer, so the taxpayer must itemize to get any benefit. Plus, employee business expenses are subject to a reduction of 2% of adjusted gross income.

For example, our director has adjusted gross income of $150,000 (2% of that figure is $3,000). The first $3,000 of Form 2106 expenses are non-deductible and the director gets a net deduction of $12,750 minus $3,000, or $9,750—$15,000 gets included as income and $9,750 gets deducted. That leaves the director paying tax on $5,250 of income. In addition, the director pays tax on this $5,250 to Michigan as well. This isn’t as good a deal as the other two options, but it would be a lot easier, accounting-wise, on General Motors. They just throw all of the expense on the director’s W-2 and let him deal with it.

But General Motors was called Generous Motors for many reasons. In all actuality, they probably ignored the personal usage of our fictitious regional marketing director and didn’t allocate any income to him at all—not technically legal, but probably real world. I wonder if they also ignored Tiger Woods’ personal usage? This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action
Tax Service, located on Northland Drive in
Rockford. Contact Jerry at Action’s website,
www.actiontaxservice.com.

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