Leasing Company Cars
Among consumers, leasing cars is increasingly popular. According to Experian Automotive, a data provider, a record 27.5% of new cars financed in the first quarter of 2013 were leased, compared with 24.4% one year earlier. Thus, if you provide company cars to one or more employees, you might consider leasing rather than the traditional purchase arrangement. Leasing company cars offers obvious advantages. Assuming that your company leases the cars for two or three years, your employees will always be driving a new or relatively new car on business.
Leasing cars for no longer than three years can present a more professional image to clients and prospects and reduce the chance your employees will have major operating problems, which can affect productivity.
Leasing cars can deliver financial advantages, too. Upfront costs may be lower when you lease rather than buy a car. Monthly payments likely will be lower than you’d pay on a car loan. As mentioned, short term leases reduce the chance your employees will need expensive repairs.
The downside, of course, is that your company won’t actually own the cars. Leased cars won’t deliver the same resale value, and your company won’t be able to enjoy the long-term cost savings that come from keeping a car after the purchase price has been fully paid. In addition, when you lease company cars, you’ll have to urge employees to observe mileage restrictions and avoid unnecessary wear and tear.
Superior tax savings Your company also may save tax by leasing its company cars. You’ll pay sales tax only on the monthly lease payments, rather than on the full purchase price.
Once your employees are driving their leased company cars, your company can deduct the lease payments as well as all the related costs, from gas and oil to inspections and maintenance. You should make your employees aware that this tax treatment applies only to the business use of their company car. Therefore, they must keep a log or use some other method of substantiating their percentage of business car use, rather than personal use.
For your employees, personal use of their company car is considered a taxable fringe benefit. Thus, each year the company must determine the value of the fringe benefit for their employees with company cars, so those employees can pay the resulting income tax.
Commuting to work counts as taxable personal use, along with driving for vacations and any other nonbusiness reasons. Among several allowable methods to put a value on personal use, most companies use the Annual Lease Value table, found in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, to determine the value of personal use of leased company cars.
Example: ABC Corp. provides employee Sarah Perkins with a leased car; Sarah gets the car when it’s new with a fair market value of $35,000. According to the IRS lease value table, the annual lease value of that car is $9,250.
Sarah’s logs show that she drives the leased car a total of 15,000 miles this year, including 3,000 miles (20%) for personal use. Therefore, she has a personal use factor of 20%, so her personal use is valued at $1,850: 20% of $9,250.
Consequently, ABC reports that Sarah had $1,850 of taxable fringe benefits from her used car. Reimbursements for gasoline must be reported, too, at 5.5 cents per personal use mile. ABC must perform similar calculations and reporting for each employee who has personal use of a company car. Our office can help your company create a reporting system that complies with IRS regulations.