When Employees Use Vehicles

If you have employees, it's likely that from time to time they may use their car for business purposes, perhaps to make sales calls, make deliveries, or pick up supplies or equipment.

If this happens often enough, you may decide to reimburse the employees' expenses for using their car, or you may decide to provide a company car or truck for them to use. In some cases, the company car may be available for their personal use as well. Don't forget that if your business is incorporated, you yourself will generally be treated as an employee for income tax purposes, so the discussion of "employees" can apply to you as a shareholder/employee as well.

Once you make the choice to reimburse employees' expenses or provide a company car, how does this affect your income taxes? Perhaps more to the point, how can you arrange things so that your business, and your employees, get the greatest tax benefit possible? The following sections are designed to answer these questions.

  • If you don't reimburse your employees for vehicle expenses, the employees will generally be able to deduct these expenses on their individual item tax returns, as a miscellaneous itemized deduction.
  • If you do reimburse the employees for vehicle expenses, the tax treatment hinges on whether you use an "accountable plan" or a "nonaccountable plan." Reimbursements made under an accountable plan are deductible business expenses to you, and are excluded from your employees' taxable income.
  • If you provide a company car to an employee, the total cost of providing it will generally be a business deduction for you. However, the value of the personal use of the car (if any) must be treated as a taxable fringe benefit to the employee.

The most important step you need to take, in order to get the most tax benefits out of employees' business use of vehicles, is to implement a system of substantiating employees' expenses.

Substantiation. Any business use of your vehicle must be substantiated in order for you to deduct business expenses associated with the vehicle. Where employees are involved, basically this means that your workers should keep written mileage records that show the length and purpose of their business trips. The determination of whether a car trip was deductible business-related travel is made under the same rules that apply to your own business travel.

Your employees' records will be enough to support the deduction unless you know or have reason to know that the statement, records, or other evidence are not accurate. Be sure to retain a copy of the records maintained by your employees or any other corroborating evidence that is available.

The business-use substantiation rules do not apply to qualified non-personal use vehicles. These are vehicles that, by reason of their nature, are not likely to be used for more than a minimal amount for personal use. Examples include a delivery truck with seating only for the driver, or a specialized repair truck.

If your employees' don't keep records of their business mileage in a car that you provide to them, you can also satisfy the substantiation requirements if you report the value of the availability of the vehicle as taxable income to your employees (and withhold payroll taxes on this income, if required). In that case, your business use of the vehicle is deemed to be 100 percent, and you can generally deduct 100 percent of the cost. This alternative is not available for employees that own 5 percent or more of your business or if the employee is related to you.


Work Smart

The discussion above examines some common tax issues associated with having employees use your vehicles. Please recognize that there are also several non-tax issues associated with such use - especially the fact that you may be liable for accidents in which those employees are involved.