Why give a company car to an employee?

There might be multiple good reasons for you deciding to give one of your staff members a car. You might decide to do it as a nice bonus because they’ve been exceptionally productive for your company’s benefit. Or maybe a staff member needs it to do their job effectively and can’t afford the correct type of vehicle on their own.

You also need to decide if the gift is conditional and temporary. You might “gift” an employee a car that they can use however they like for as long as they continue to work with you but establish that it has to be given back to your company if they leave the job.

These decisions will depend on your specific circumstances. The legal and financial implications involved are more universal. You should cover the specifics of these implications with your CPA or tax attorney because the following information isn’t formal advice. With that said, here are some legal and operational factors to take into account when awarding a car to one of your employees.

IRS regulations to consider

The Internal Revenue Service (IRS) has a term for infrequent, non-extravagant gifts given to employees. They’re called de minimis, and under the right conditions, some of these rewards may be exempt from taxes.

For example, articles of clothing, small household goods and low-value trophies such as necklaces or watches can all be considered de minimis. Generally, with some exceptions, these types of gifts shouldn’t exceed an individual value of $109 per gift per employee, or a total of $252 in gifts per year.

Gifts can also be given to employees tax-free up to a value of $1,600 if they’re classified as achievement awards. In this case, however, they have to be tangible gifts (not cash or cash equivalents) and must not be given as a form of substitute compensation for regular wages.

Above a threshold value of $1,600, most formal gifts to employees (including cars) will be treated by the IRS as wages and subjected to income taxes based on their W-2 filings. This exclusion amount can possibly be changed upward in the case of highly paid staff members.

Where things get more complicated, either for you or the employee receiving the gift, is when it comes to gifts of $15,000 or more in value. Most new cars cost more than this. In other words, if you give an individual employee a vehicle or gift of any kind with a cost of $14,999 or less, it may still be tax-exempt but usually only if the gift is given without business or work-related condition as a personal present from one individual to another.

Once you go over this amount for this individual gift, your recipient may have to pay a gift tax on the car. These variable IRS clauses for different definitions of gifts are why you should carefully consult with your CPA or tax attorney on any cars you want to give as rewards to employees.

You should also know that the IRS doesn’t let you classify cars given to struggling employees as tax-exempt charitable donations. IRS rules state that tax exemptions on charitable giving only apply for registered 501(c)(3) nonprofit organizations, not individuals or company staff.

Keep other car-related expenses in mind

Even if you manage to give one of your employees a car as a personal present, bear in mind that the vehicle will come with other expenses. These might include title transfer costs, insurance fees, gas expenses and parking costs.

In the case of presents that were given to employees with personal financial problems, having to cover these new expenses might cause them more harm than good. These are details that you should discuss carefully with your potential gift recipient before you hand over the keys.

Work-related use exemptions on vehicle gifts

You can give your employees cars that will be used mostly for business and work-related situations. If you can document that a car given to an employee is used for work-related transportation, this can let the vehicle be exempted from gift taxes or classification as a type of compensation.

You and your employees should also know that only business-use expenses for a company car that your staff member is also using as a personal vehicle can be deducted from employment tax obligations.

Your employee should keep meticulous records of their driving and evidence of how their car-related spending was because of work instead of personal reasons. It’s also worth noting that simple back-and-forth commuting expenses from home to work usually aren’t tax-deductible as business costs. The following sections cover these issues in further detail.

Using auto allowances and accountable plans

Another option that your business has for offsetting the tax and personal costs for an employee you gave a car to is an auto allowance. You normally have to set this up through what’s called an accountable plan. The funds deposited through the plan usually won’t be considered taxable benefits for the user.

However, the IRS will want proof that the car-related expenses being covered by the allowance are for genuine business expenses and that they’re first being paid for by the employee and then reimbursed by company funds. Employees should keep careful records of their expenses, and it’s worth remembering that auto allowances have their limits.

For example, fixed monthly car allowances are usually taxable at both the state and federal level. Employees and employers must usually even pay FICA and Medicare taxes on their allowance. This can lead to reductions of as much as 30% on the allowance’s spendable amount. You as an employer need to factor these tax-induced losses into your allowance amounts for an employee that you’ve given a company car to.

The IRS has its own set of complex rules for how auto allowances and accountable plans work. You should review these with your accountant.

Leasing cars as temporary gifts

Your company can also lease one or more cars that are given to employees for their own personal use and for work-related reasons. Because these cars aren’t formally registered gifts that become the property of the employee, they can be made tax-exempt. However, the specific conditions of the lease, liability issues and insurance coverage details are something you’ll need to cover in detail with your employee.

If you lease a car in the name of your business and give it to an employee for both work-related and personal use, the lease payments are deductible as business expenses as long as the car is used for business purposes.

If you reimburse your employee for their business driving expenses, they’re not taxable if you’re using an accountable plan. However, if you don’t reimburse the employee for their car-related work expenses, that person can’t deduct them from their personal tax return.

The bottom line

If you gift or conditionally give one of your employees a company car, they can generally use that vehicle for both work reasons and personal driving. If you reimburse them for their work-related use, they can avoid taxes on those reimbursements. For their personal use expenses, these can be treated as fringe benefit wages, which will have to be included on their W-2 filings.

Because of these conditions, your employee will usually have to cover the costs of income tax derived from the personal value that the car gave them.

Despite these complications and expenses, your gift-recipient staffer will still be saved from the personal costs of having to buy their own new car and maintaining it. For employees who already needed a new car, the benefits of being gifted a vehicle can be large. However, if you simply wish to give a car to an employee who didn’t need it in the first place, you should carefully consider the tax implications and other expenses that it might put upon them.