Congress doesn’t allow the common taxpayer to deduct his costs of travel to and from work; therefore the owner isn’t allowed to deduct this either. So how is this managed or addressed with bookkeeping. To answer this and illustrate how the bookkeeper handles the day-to-day activities related to transportation costs of vehicles used by the owner and family members I’ll first explain who must have separate accounting related to travel. Next I will delve into the concepts and principles involved. Finally I will illustrate proper documentation along with accounting procedures and provide a full detailed example.
The Internal Revenue Service defines the benefit recipient as any employee, owner, key person (management), director, shareholder or family member of these individuals using a company purchased vehicle for personal travel to and from work. In effect the key test is if the vehicle is customarily taken home at night by this individual. Taking the car home once in awhile does not meet this test. Look at these two examples:
In Route to Destination
George is a quality control tester for a manufacturing company with two sites 120 miles apart. George lives 20 miles from Plant A where he normally goes to work and 100 miles from Plant B. Basically, George’s home is in-between the two plants. Once a week George must travel to Plant B to test and calibrate the equipment. The company allows George to park his car at Plant A and drive a company truck home the night before and drive to Plant B the next day. After spending the day at Plant B, George drives from Plant B back home and uses the truck to drive to work (Plant A) the next morning. George resumes using his personal vehicle.
In this example, George does not really gain any personal benefit for the use of the truck. The truck would have had to travel the full 240 miles even if George didn’t stop at home.
Carmen is a sales representative for a radio advertising firm. Her normal schedule requires her to drive to work daily using her personal car. Each month all sales reps gather together at regional headquarters. The company allows Carmen to use the company vehicle to travel to regional meetings. She is allowed to drive it home the night before her travel day to the regional meeting.
Again, similar to George’s case, Carmen’s use is infrequent and therefore doesn’t qualify as gaining a personal benefit for the use of the car.
To meet the test, the car must be taken home regularly such as most of the time or all the time. A good example is in auto sales. A very common practice at auto dealerships is allowing salesmen to drive models home at night. This definitely qualifies as a personal benefit to the employee.
Other examples that meet the test of personal use include:
A) The owner’s wife using a company car for her daily activities even if she isn’t an employee.
B) The owner drives a company car at night even though he actively meets with customers from his home office.
C) A construction project manager driving a truck as a function of his duties. He drives the truck home at night.
D) Corporate officers or shareholders using a company car for personal vacations or long trips that do not involve company business.
E) Key individuals such as the operations manager, finance director or human resources manager having a company car.
All of the above are common examples. The underlying principle is that the personal travel component (taking the car home or on a personal trip) is considered nondeductible for tax purposes unless that value is assigned as income to the individual receiving the benefit. The tax code goes further and mandates that this value is assigned as earned income to the beneficiary.
Understanding the reasoning behind assigning this value to an employee is the key to applying the accounting process to the overall costs involved in operating vehicles.
Concepts and Principles of Personal Use of Business Assets
Congress uses the average taxpayer test to set the basis of the law and the corresponding regulations. The average person drives to and from work each day. The costs of transportation are fully borne by the employee. The employer doesn’t pay anything extra. Furthermore, the costs are paid from after tax earned income. Earned income refers to normal wages that are taxed for Social Security, Medicare and income taxes. The employer matches the Social Security and Medicare tax.
To maintain equality in treatment, any qualified employee receiving this transportation benefit should pay the earned income taxes (Social Security/Medicare/income taxes). Therefore, the benefit is a net value no differently than what the average taxpayer incurs. In effect, the benefit is included in the employee’s wages and is fully taxed.
The company can now deduct this benefit as an expense for tax purposes. To complicate this further, the employer must match the Social Security tax and Medicare tax just like it does with regular wages. See Lesson 31 for a basic understanding of a simple payroll.
The primary lesson here is that the value of the transportation benefit is earned income.
There are some principles involved for the employer (business). First, the costs associated with transportation are comprised of two components, costs of transportation for business purposes and costs incurred for the employee to use the car for their personal benefit. The formula hinges on the total miles driven and the number of miles use for personal travel. Look at the following example and schedule:
George owns a construction company and drives a company truck. George lives 11 miles from the office. George works 5 days a week except for 13 weeks during the summer when he works 6 days a week. He takes two weeks off per year for vacation. During 2015 George drove the truck 27,208 miles and it cost $11,347 to operate the truck including depreciation. How much is George’s personal share of the costs?
Step 1 – Determine George’s Personal Miles Driven
Number of Weeks of Driving 50 (52 Weeks – 2 Weeks for Vacation)
Number of Weeks @ 5 Days 37 Short Weeks
Number of Weeks @ 6 Days 13 Long Weeks
Total Number of Days Long Weeks Short Weeks
. 13 37
. * 6 * 5
Total # of Days 78 + 185 = 263 Work Days
Number of Personal Miles Per Day 11(one-way)*2 = * 22
Total Number of Personal Miles = 5,786
Step 2 – Ratio of Personal to Business Miles
Personal Ratio = 5,786/27,208 Total Miles = 21.27%
Work Ratio = (27,208 – 5,786)/27,208 = 78.73%
Step 3 – Allocate Costs to the Respective Functions Using an Allocation Schedule
. Business Personal
Total Costs $11,347 $11,347
Ratio .7873 .2127
Allocation of Costs $8,934 $2,413
George’s personal share (value) of using the truck is $2,413.
Often other forms of personal miles are included in determining total number of personal miles. When the vehicle is used for other personal functions such as shopping, family functions, sporting activities etc.; these miles must also be included in the calculation which brings us to the second principle involved, accurate records.
Every vehicle must have accurate mileage logs to track miles for personal and business use. Read Mileage Deduction Rate -2015 or an in-depth explanation and illustration of how to create and manage mileage logs. I emphasize using codes (shorthand) to simplify the process.
The final principle related to transportation cost allocation is the accounting system used to assign costs to a vehicle. There are basically three different systems. The best and most accurate is specific identification. Next is grouping of costs and the final and least accurate is pooling of transportation costs. The following explains these three different systems and their drawbacks.
Specific Identification – This system assigns each cost to the specific vehicle incurring the respective cost. It requires accurate records using a good chart of accounts and corresponding spreadsheets. The end result is actual costs to operate a single unit in the fleet.
Grouping of Costs – An alternative is to assign costs to a similar group of vehicles. Examples include cars in one group while working trucks and vans are in a separate group. A third group may include specific use equipment like cube trucks and/or flatbeds etc. The key is to have similar characteristics within the group so costs are not heavily weighted in one direction because of a unique factor such as fuel consumption, legal registration, insurance requirements or repair costs.
The drawback to grouping of costs include decreased accuracy related to costs to operate a single unit. In addition, the skills of the accountant must be greater to recognize the group characteristics when assigning assets to a group.
Pooling of Costs – The least accurate and simplest system of tracking costs is the pooling method. In effect, all costs for all vehicles of a particular function (such as fuel) are pooled (assigned to one account and not a vehicle or group). So the fuel costs of the light dump truck is grouped together with the fuel costs of the company’s hybrid car. Obviously the more expensive vehicles to operate skew the cost per mile higher.
If the company has an entire fleet of similar vehicles like a taxicab operation, pooling is more efficient and acceptable. Whereas a highly diverse fleet of vehicles, especially specific purpose vehicles, the use of the specific identification system is superior in evaluating cost per mile of transportation.
No matter which system is used, the accountant must properly account for the allocation to the respective employee.
Proper Documentation and Accounting Procedures
In Lesson 60 I explained in detail how to track the costs in the accounting software recording to a specific vehicle and using an Excel spreadsheet. In addition, I touched on how to track mileage for the respective vehicle. In that section of the vehicle’s spreadsheet, simply add an additional table allocating the miles that month between business and personal for the respective driver. The table includes the calculation for personal use as illustrated earlier. Once the value of personal use is determined, it is time to make the accounting entry.
All of the transportation costs are accumulated in the transportation expense section.
Via the chart of accounts, add another child account as a contra account at the bottom of the transportation set of accounts. Name the account ‘Personal Use Offset’. This contra account will have a credit balance equal to the value for personal use as determined in the spreadsheet. The offsetting debit is to the labor account for the respective individual. If this individual has a role with labor for cost of sales, add a cost of sales type of account under labor named ‘Transportation Benefit’. The structure will look like this:
Cost of Sales
. – Materials
. – Labor
. – Project Management Salaries
. – Hourly Wages
. – Commissions/Bonuses
. – Transportation Benefits
. – Payroll Taxes
. – Subcontractors
. – Engineering/Legal
. – Other
A similar structure is created in the management section of expenses where the compensation for owners/officers is recorded.
The transportation benefit is taxable to the employee for all taxes. The actual payroll function is explained in more detail in the advanced section of bookkeeping on this website. Please be sure to read that lesson. Print out a copy of the spreadsheet for that month to report the information to the employee. Also, print a PDF and save it to the employee’s file and to the accounting folder for personal use offset.
There are many other quirks related to personal use of a vehicle and how they are accounted for in bookkeeping. Again, the advanced section of bookkeeping goes into greater detail related to these odd situations. These quirks include:
* How to handle accidents and deductibles
* Accounting for vacation use of the vehicle
* Use by family members
* Sale of the vehicle to a family member
To incorporate all the sections above, a good example and illustration is appropriate.
Dennis owns a cell tower installation and maintenance company. He drives a company truck. His primary function is estimating jobs requiring regular travel of upwards of 200 miles to a potential job site. At night Dennis drives home directly from existing and potential job sites. The production and maintenance facility is located exactly 16.7 miles from his house. Dennis rarely works on Saturdays and often takes Fridays off, especially during the summer.
Dennis uses the truck like his personal vehicle for family obligations including coaching, volunteer work and hauling his boat for fishing. Often Dennis takes the truck for his hunting trips in the fall. At home he even uses the truck to take trash to the landfill on the weekends.
Dennis despises filling out the mileage log book. To maintain compliance, his secretary records the mileage from the odometer every Friday and Monday morning. Trip analysis is done using Google maps for his respective job sites. His daily schedule is tracked and a log is maintained in the office including odometer readings at each fill up (a requirement of the fleet card system). Dennis usually drives upwards of 45,000 miles per year and buys a new company truck every three years. In essence, he abuses the truck.
During 2016, Dennis drove 47,118 miles. He worked 219 days that year. Actual costs to operate that particular vehicle were as follows:
Truck # 17
Fuel – $7,139
Maintenance – 671
Repairs – 482
Insurance – 2,496
Taxes/Registration/Tags – 815
Depreciation – 6,886
Interest – 2,505
Total Costs Truck # 17 $20,994
The cost per mile equals 44.56 cents. Because the company has 19 active vehicles, the company does not use the mileage deduction method for tax purposes.
The secretary determines Dennis’ personal mileage as follows:
1) Home Driving – 16.7 miles * 219 Days * 2 (Round Trip) = 7,315
2) Weekend Use – Based on starting and ending odometer readings = 5,214
. Less trip tickets for Fridays in accordance with Google maps = (1,802)
3) Hunting Trips – Two fall trips = 971
4) Vacation Trip to Beach = 1,077
Total Personal Use of Truck # 17 12,775
The personal to business use table looks like this:
. Business Personal
Total Miles 47,118 47,118
Personal Use 12,775 12,775
Let Business Use 34,343 34,343
Ratios 72.89% 27.11%
Costs to Operate $20,994 $20,994
Assignment of Costs $15,303 $5,691
The payroll staff adds $5,681 of mileage benefit to Dennis’ personal wages and offsets the costs to personal use offset in the transportation costs section of expenses.
Summary – Deductible Auto Costs
When owners, directors, shareholders and family members use a company vehicle for personal purposes the associated transportation costs are not deductible for tax purposes unless the company assigns the prorated value to the owner or employee as earned income.
Any employee or direct/indirect owner must pick up this benefit value as income in order to comply with the Internal Revenue Code. The primary test of receiving the benefit is using the company car in lieu of the employee’s personal auto for day-to-day travel. Congress considers personal use of a taxpayer’s car to work normal and reasonable. Substituting a company car for this purpose is the same as receiving additional income. Therefore, the company must assign or allocate this value to the employee (user).
The allocation formula is based on the ratio of personal use to total miles driven. This percentage of personal use is multiplied by total costs to operate the vehicle to calculate the dollar value of this benefit. This benefit value is included in the employee’s annual W-2. ACT ON KNOWLEDGE.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.