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