TAKE HOME CARS AND THE IRS
An issue has arisen regarding whether or not officers who take home cars which belong to the department will be taxed for the value of the use of the vehicle during the commute back and forth from work. The IRS has always considered the personal use of a vehicle owned by any employer, by an employee, as a “non cash taxable fringe benefit” and the value of that benefit must be included in the employee’s wages making it subject to income and employment taxes.
However, an employee’s use of a “qulaified non-personal use vehicle” is NOT subject to taxation and should not be included in his/her wages. A “qualified non-personal use vehicle” is defined by the IRS and, generally, is any vehicle the employee is not likely to use more than minimally for personal purposes because of its design. Those types of vehicles include, but are not limited to, (1) clearly marked police and fire vehicles; and (2) unmarked vehicles used by law enforcement officers. [Note: those officers MUST be authorized to carry a firearm, execute search warrants and make arrests. As such, if an officer’s peace officer authority has been temporarily suspended (eg. pending a medical evaluation), he/she will not qualify for the exemption].
Therefore, if an employer provides an employee with an employer-owned vehicle that does not qualify as a non-personal use vehicle, and the employee uses the vehicle for personal use, which includes commuting, the personal use of the vehicle is a non-cash taxable fringe benefit. It is the employer’s legal obligation to determine the actual value of the fringe benefit and to include the taxable protion in the employee’s income. It is irrelevant that the taking home of the vehicle may also benefit the employer.
UNMARKED VEHICLES
The issue which has arisen involves taking home an unmarked police vehicle. In at least one jurisdiction the IRS has ruled that the Chief of Police and his Commander were not covered by the exemption and that the city must include the value of their personal use in their wages. The auditor initially ruled that the exemption didn’t apply because the Chief and Commander lived outside the city they served. There is, to the best of our knowledge, no provision in the IRS Regulations which requires the employee to live within the municipality by which he/she is employed in order for the exemption to apply.
The second reason for denying the exemption is that the auditor ruled that the Regulations require employees to keep records of all non-business, personal, use and that argument may have merit. It is generally accepted that one must keep track of personal use of the employers property in order to justify the deduction for business use. For example, a trip log which shows the mileage of the commute would prove that the “qualified non-personal use vehicle” was not being used personally for anything other than the commute – which is considered “mininal” and allowed. Otherwise, the IRS could assume that the employee was using the vehicle for personal reasons when not on duty. The burden is on the employee to prove that he/she is NOT using it for personal reasons.
It is also necessary for a policy to be in place to allow the taking home of unmarked vehicles: (1) the use of the vehicle must be approved by the appropriate authority; (2) the vehicle must contain law enforcement equipment (eg. radio, emergency light, siren); and (3) any personal use must be restricted to that which is de minimis or minimal (eg. stopping for milk on the way home). The theory is that the employee needs immediate access to the vehicle to respond from home to an emergency in order to do his/her job.
VALUATION OF BENEFIT
There are three methods that can be used to determine the value of a vehicle provided to an employee: (1) general valuation rule; (2) cents-per-mile rule; and (3) automobile lease rule. Under the general valuation rule the value of a fringe benefit is its fair market value, which is the amount an employee would have to pay for that benefit. The IRS has a formula to determine thta amount. Under the cents-per-mile rule, the amount is determined by multiflying the standard mileage rate by the total miles the employee drives the vehicle for personal use. For 2007, the standard mileage rate set by the IRS is 48.5 cents per mile. To use the automobile lease rate the fair market value of the vheicle must be determined as set forth in the IRS Publication 15-B and must add the fair market value of fuel provided by the employer.
If one is considered a “control employee” he/she can only use the cents-per-mile rule or the automobile lease rule. One is a “control employee” is he/she earns a salary which is equal to, or greater than, the Federal Executive Level V ($136,200 for 2007) or is an elected official, such as a Sheriff in California.
HOW THIS AFFECTS YOUR AGENCY
Confusion has been created by the auditor’s ruling discussed above since it has always been assumed that taking home an unmarked emergency vehicle did not subject the employee to any tax liability. However, in light of this situation, which is going to be appealed by the Chief and Commander, we would urge that advice and guidance be sought from a knowledgeable certified public accountant or tax attorney since the impact could be significant. In the cited case, the Chief was told by the auditor that she had concluded that the fair market value for his use of the vehicle was $9,960.00 and that he would be subject to taxes on that amount – that’s a fairly significant “hit.”
We would also suggest discussing this with the employing city or county to insure that they will support anyone who is authorized to take home such a vehicle in case the IRS challenges their use of the exemption. This is one of those situation where one needs to be prepared before the IRS comes knocking at the door. Always remember that they “got” Capone – if they could get him, they can get anyone.
As always, if you wish to discuss this in greater detail, please feel free to contact me at (714) 446 – 1400 or via e-mail at mjm@jones-mayer.com.
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