Watch Out for Excess Benefits from Personal Use of A Vehicle

Employee fringe benefits such as the personal use of a vehicle furnished by a nonprofit organization is a common employee benefit and is generally taxable unless specifically excluded from compensation.

The fair market value (FMV) of a taxable benefit, less any payment by the employee, must be included in the employee's gross income. The FMV of a fringe benefit is normally the amount an individual would have to pay for it in an arm's-length transaction. An economic benefit that should be treated as compensation to a disqualified person but is not, is an automatic excess benefit. This is the rule even though total compensation would have been reasonable if the economic benefit had been included in compensation.

When looking at the use of a vehicle, there are three potential methods that can be used to determine the amount of the employee's compensation:

• The business standard mileage rule.
• The commuting valuation rule.
• The automobile lease value rule.
• Business Standard Mileage Rule

Compensation is calculated by multiplying personal usage miles (which include commuting miles) by the annual mileage rate, $0.55 per mile for 2009. If the organization doesn't provide fuel, the mileage rate can be reduced by $0.055 per mile. However, the mileage rate can't be used if the vehicle's FMV as of the date it's first made available for personal use exceeds an annually adjusted amount ($15,000 for 2009 for a car, $15,200 for a truck or van). The rule requires that the employee maintain a mileage log or some other reasonable method to tabulate personal miles.

Commuting Valuation Rule

The commuting valuation rule can be used only when the organization provides the employee a vehicle for commuting for bona fide noncompensatory business reasons. Compensation is equal to $1.50 for each way in a commute.

Lease Value Rule

To compute an auto's annual lease value, first determine fair market value (FMV) as of the first date it is made available to any employee for personal use. Under safe harbor rules, if the auto is bought at arm's-length by the employer, the FMV is the cost, including sales tax, title fees, and other purchase expenses. When the auto is leased, it's the suggested retail price less 8%, the retail value as reported in a national recognized publication that regularly reports such values, or the manufacturer's invoice price plus 4%. Using the table below, find the dollar range in column (1) of the table that includes the auto's FMV. The corresponding amount in column (2) of the table is its annual lease value.

Automobile Fair Market Value (1)    Annual Leased Value (2)
$0 to 999                                                    $600
1,000 to 1,999                                             850
2,000 to 2,999                                            1,100
3,000 to 3,999                                            1,350
4,000 to 4,999                                            1,600
5,000 to 5,999                                            1,850
6,000 to 6,999                                            2,100
7,000 to 7,999                                            2,350
8,000 to 8,999                                            2,600
9,000 to 9,999                                            2,850
10,000 to 10,999                                        3,100
11,000 to 11,999                                        3,350
12,000 to 12,999                                        3,600
13,000 to 13,999                                        3,850
14,000 to 14,999                                        4,100
15,000 to 15,999                                        4,350
16,000 to 16,999                                        4,600
17,000 to 17,999                                        4,850
18,000 to 18,999                                        5,100
19,000 to 19,999                                        5,350
20,000 to 20,999                                        5,600
21,000 to 21,999                                        5,850
22,000 to 22,999                                        6,100
23,000 to 23,999                                        6,350
24,000 to 24,999                                        6,600
25,000 to 25,999                                        6,850
26,000 to 27,999                                        7,250
28,000 to 29,999                                        7,750
30,000 to 31,999                                        8,250
32,000 to 33,999                                        8,750
34,000 to 35,999                                        9,250
36,000 to 37,999                                        9,750
38,000 to 39,999                                        10,250
40,000 to 41,999                                        10,750
42,000 to 43,999                                        11,250
44,000 to 45,999                                        11,750
46,000 to 47,999                                        2,250
48,000 to 49,999                                        12,750
50,000 to 51,999                                        13,250
52,000 to 53,999                                        13,750
54,000 to 55,999                                        14,250
56,000 to 57,999                                        14,750
58,000 to 59,999                                        15,250

For vehicles having a fair market value in excess of $59,999, the Annual Lease Value is equal to: (0.25 x the fair market value of the automobile) + $500.

Including the value of the personal usage of a vehicle in a disqualified person's compensation is critical for a public charity, since the failure to do so can trigger the excise tax on an excess benefit transaction. (Disqualified persons are generally directors or certain officers.).

If you have questions, please give us a call.