If you have an employer-provided automobile, your employer usually is required to add back some income to your W-2 form.
An employer and employee can elect to use the automobile lease valuation rule to value personal use of an employer-provided automobile.
The first step in this process is to determine the fair market value of the car. You can do this in basically four different ways, depending on the facts and circumstances of the transaction:
1. The employer’s cost of purchasing an automobile, including sales tax, title and other expenses, can be used as the fair value if the purchase was made in an arm’s-length transaction. This method would apply only if the car was purchased.
2. The retail value as reported by a nationally recognized pricing source can be used as the fair market value of a leased automobile.
3. The manufacturer’s suggested retail price, including sales taxes and title and other expenses, less 8 percent, can be used for leased vehicles only.
4. The manufacturer’s invoice price including options, plus 4 percent, can be used for leased vehicles only.
The fair market value of the vehicle is reduced when the employee contributes an amount toward the purchase or lease of the vehicle.
Once the fair market value is determined, the second step is to determine the annual lease value for the vehicle. The IRS provides a table in its regulations that lists the annual lease value for various fair market values.
The third step, once the annual lease value is determined, is to calculate the business-/personal-use percentage. It’s best if you have kept a mileage log during the year. Use the mileage log to determine the total miles driven vs. personal miles. Then multiply the personal-use percentage times the annual lease value to determine the amount of income that should be added back to your W-2.
An employer-provided vehicle is considered a partially taxable fringe benefit. The personal-use portion of the vehicle is considered taxable. For this reason, an amount is added back to your W-2 at the end of the year.