For the bookkeeper/accountant the tracking and allocation of these costs are tricky. This lesson covers the accounting process for employer-provided vehicles and how to include the personal use element in the wages of the employee. To successfully educate the accountant about this advanced skill this lesson first explains the mileage log and its instrumental impact on the formula. The next section covers the pooling of costs and associated procedures. This section will also cover the allocation formula for a leased vehicle. Another section will walk the accountant through the process of creation of the allocation model and the assignment to the employee’s wages. This includes the reconciliation process to Form 941 and W-2. The final section will cover some insights about this benefit and the Internal Revenue Service perspective of owners’ using company vehicles.
Before continuing with this lesson, please refresh yourself or read the following lessons related to the use and tracking of auto costs in business:
- Vehicle Operations and Accounting (Lesson 60)
- Mileage Reimbursement (Lesson 61)
- Auto Costs Related to Owners and Family Members (Lesson 62)
- Other Transportation Issues (Lesson 63)
Each vehicle in the fleet must have a mileage log which tracks its use. Each day a line entry exists for each trip from point ‘A’ to point ‘B’. It includes the distance of travel and purpose. I encourage accountants to use a code system for the common destinations as this chart illustrates for this new home builder.
. KINGSTON CONTRACTING
. Destination Schedule
. A Main Office – Downtown
. B Field Office – Wakefield
. C Lowe’s – Wakefield
. D Lowe’s – Cranston
. E Home Depot – Cranston
. F County Office Complex
. G Bank – BB&T Downtown
. H Bank – BB&T Wakefield
. I Fuel Depot – I95 Exit 19A
. J …
Employees assigned the vehicle should include a ‘Z’ code for their home address. Any personal use is coded with a ‘Z’ and the number of miles is recorded. Employees turn in the prior week’s log on Monday mornings for the accountant to process. The employee should include fuel receipts so the accountant can match the tickets to the fleet card’s ledger (online report). Every month the accountant needs to record the odometer reading to calculate the total number of miles driven during the accounting period.
The log information is summed for business miles and personal use miles for the employee. The summation schedule will look like this:
F150 Pickup #9317 King-08 Driver: James Burke
November 2016 Ending Odometer: 47,114 Total Miles Driven in Nov: 1,981
. Business Personal Total
Week Ending Nov 6, 16 309 141 450
Week Ending Nov 13, 16 316 119 435
Week Ending Nov 20, 16 285 112 397
Week Ending Nov 27, 16 206 87 293
Week Ending Nov 30, 16 (Wed) 318 88 406
. 1,434 547 1,981
This schedule is repeated for every month to generate a tally for the entire year. Scan in each weekly log and link the attachment to the respective week in the spreadsheet.
The Internal Revenue Service requires the mileage log. By forcing employees to report weekly prevents them from getting behind in filling them out. Ultimately the total miles are subdivided into two groups: business and personal. It is important for the employee to understand that the IRS expects to see at a minimum the mileage to and from the office and the employee’s home as the starting value for personal miles. As an example, if the employee’s home is 5.5 miles away, then at a minimum, 11 miles a workday are personal. If the employee works 230 days a year, then the IRS expects an allocation of costs to cover 2,530 miles out of the total assigned to the employee. To assign these costs, the accountant must first pool the costs.
Pooling of Costs
As explained in Lesson 60, the accountant is responsible to pool all costs to operate each vehicle. Costs include:
- Property Taxes
Notice interest is not included. This is because interest is a function of capital and is a cost to borrow money, not a cost to operate a vehicle. Some costs are easy to identify such as fuel but some are part of a combined payment such as insurance. It is possible that within the insurance binder the cost per month is broken out by vehicle. Many policies are a lump sum for all vehicles. It is not critical to be accurate, even a simple division of the dollar amount by number of vehicles is acceptable as a slight deviation spread over several thousand miles will not adversely affect the final result. This illustration demonstrates this effect.
. Insurance Premium Per Month $2,914
. Number of Units in the Fleet 23
. Assignment Per Unit $126.70
. Mileage for Unit #9317 1,981
. Insurance Per Mile 6.40 Cents or $.064
If insurance is $25 higher for Unit #9317 via some other allocation model, insurance per mile increases to 7.65 cents per mile or an additional 1.25 cents per mile. On average the total cost per mile to operate a vehicle will range from 50 cents to 85 cents per mile, so a 1.25 cent change is a mere 2%. Another way to look at this is that unit #9317 could have an additional $24.76 assigned to it for this particular month or around $300 over the course of a year. If the employee driving the vehicle uses it 15% of the time for personal use, then he would be assigned an additional $45 over the course of a year as additional income. The Internal Revenue Service isn’t going to go bonkers over your failure to get it 100% accurate and get this employee assigned this additional $45 which would relate to approximately $10 in additional taxes owed by that employee. Therefore, a simple insurance allocation of equal amounts per unit is fair and reasonable.
A more accurate method to allocate insurance cost is to add up all miles from all the vehicles for that time period and assign insurance costs based on the cost per mile in the aggregate. What is important is to us a reasonable model to assign or allocate costs.
One other area of allocation concerns leased vehicles. The amount included in the employee’s wages is the prorated amount of an equal lease cost for a personal vehicle for personal use compared to the average fair market value of the employer-provided vehicle. In general, the employer’s cost for a leased vehicle will be different from an individual’s lease cost for a similar automobile. If a leased vehicle is involved, simply follow the steps outlined in Regulation Section 1.61-21(a) – (e) to determine the value. In general, the formula is the annual lease amount allocated between the business and personal use plus a few hundred dollars for personal use, i.e. the benefit of driving a newer vehicle.
Now that the particular vehicle has a set of costs for the time period, it is time to allocate the costs between the employer and employee.
Allocation of Pooled Costs
Once the costs are pooled for the respective vehicle they are allocated to the employer and employee based on the mileage schedule. In the example above for this F150 pickup number 9317, Jame Burke’s personal use is 27.61% (547/1,981) for the month of November 2016. The following is the allocation result from the pooled costs:
Pooled Costs Allocation Allocation % = 27.61
Unit # 9317 (F150 Pickup) Employee: James Burke
. Cost Item Employer’s Share Employee’s Share Total
. Depreciation $369 $141 $510
. Insurance 92 35 127
. Fuel 156 60 216
. Maintenance 75 29 104
. Repairs (2 Tires) 214 82 296
. Registration/Licensing 12 4 16
. Property Taxes 51 20 71
. Tolls* – 37 37
. $969 $408 $1,377
*Tolls were allocated to the employee because James must traverse a toll daily for his commute to work. No tolls paid were related to the employer’s business.
Notice that there are exceptions to the allocation of pooled costs based on personal use of the vehicle. In James Burke’s case, the tolls are the exception. Other examples include:
- Driving Offenses (tickets, court costs, fines etc.)
- Deductibles for accidents
- Customization of the vehicle (employee requests, think of having a tow hitch installed)
- Parking infractions
In this example, James is allocated $408 as additional compensation as a benefit at the end of November. There is an accounting process to manage all this and include the assigned amount in James’ compensation.
Accounting for Employer Provided Vehicles
The initial entries from the source documents are recorded to two separate systems. The primary system, i.e. the corporate accounting program has a parent-child structure with a master account titled ‘Transportation’ or ‘Vehicle Operations’ and has a set of child accounts as follows:
. Allocation to Compensation
If designed properly, the account will include a control ID for each vehicle,I use the last four digits of the VIN as both the control ID and the vehicle number in the various reports.
The primary system is used to accumulate the costs for all vehicles in the aggregate and allows management to look at total costs for all vehicles. The secondary system is found in both the existing accounting software and via a spreadsheet.
*Existing Accounting System – The control ID allows the existing accounting software to filter down to the costs for all transportation accounts filtered to the control ID of a particular vehicle. This system relies on identifying the vehicle during the source entry of each expense when entering data in the primary system.
*Spreadsheet – A separate entry (one-sided) is recorded to a spreadsheet with tabs for each vehicle. Each tab has a row for a particular expense group and column for each month. It is a good idea to have a summation sheet that can be reconciled to the accounting report from the primary system. This spreadsheet is used to log the miles and allocation value to the respective vehicle as illustrated in the prior section.
Notice in the above account structure there is a ‘Allocation to Compensation’ account? Typically the parent and child accounts are debit accounts in either cost of sales or in expenses. The allocation to compensation account is a contra account identifying the dollar value assigned to employees and the value should equal the amounts as calculated in the spreadsheets.
The actual entry process is a fully taxable event via payroll. My suggestion is to run an end-of-month special payroll solely for benefits, specifically transportation. James’ entry is as follows:
Date ID Account Control ID Description DR CR
11/30/16 PR-113016 Labor-Benefits JEB F150 #9317 Alloc $408.22
. PR-113016 Labor-Taxes SS #9317 SS Match 25.31
. PR-113016 Labor-Taxes Medi #9317 Medi Match 5.92
. PR-113016 Accr P/R-Taxes SS JEB SS Match 25.31
. PR-113016 Accr P/R-Taxes Medi JEB Medi Match 5.92
. PR-113016 Labor-Taxes FUTA #9317 FUTA (Nov.) .17
. PR-113016 Accr P/R-Taxes FUTA JEB FUTA #9317 .17
. PR-113016 Labor-Taxes SUTA #9317 SUTA 1.02
. PR-113016 Accr P/R Taxes SUTA JEB SUTA #9317 1.02
. PR-113016 Accr P/R Taxes SS JEB W/H SS 25.31
. PR-113016 Accr P/R Taxes Medi JEB W/H Medi 5.92
. PR-113016 Accr P/R Taxes Fed JEB W/H Fed 42.10
. PR-113016 Accr P/R Taxes St JEB W/H State Income 18.23
. PR-113016 Trans/Allocation 9317 JEB Nov Allocation 408.22
. PR-113016 Employee Rcvb’s JEB JEB’s Taxes 91.56 -0- .
. $532.20 $532.20
Notice in the above entry the credit to the allocation account for vehicle #9317 for the $408.22 and of course its offset to labor benefits (either cost of sales or in the expenses section). Since this is a payroll item, the employee’s share of taxes are simply credits to accrued payroll – taxes as a current liability. The employer’s taxes (FICA matching, FUTA and SUTA) are recorded to the labor-taxes expense account and as a credit to accrued payroll – taxes as a current liability.
The problem with this entry is that since this benefit is a non-cash benefit and taxable for FICA and income (federal and state) taxes, the employee must pay his share of taxes. So the employee needs to hand over $91.56 to cover his taxes as follows:
. Federal Income Withholding $42.10
. Social Security 25.31
. Medicare 5.92
. State Withholding 18.23
. Total Taxes $91.56
Since this is impractical, the payroll clerk records it as an employee receivable and collects the amount from the next paycheck of this employee. Many employers will run this benefit as a function of an actual payroll to go ahead and clear the amount immediately while running a payroll. I do not encourage this due to several reasons as follows:
A) Accounting Flow – In a typical accounting system the actual entries to record all expenses (bills, expense tickets, depreciation etc.) occurs after the last day of the month. For example, the cash tickets for transportation expenses are turned in after the week’s end which includes the last day of a month. So as a function of month-end closing, these expenses are recorded. Transportation allocation schedules are updated and values calculated.
B) Payroll Timing – Many employers pay twice monthly thus payday is the last day of the month. But since many expense tickets including transportation information has yet to be recorded, the allocation to the employee has yet to be completed thus making it impossible to include the allocated value in that final payroll run.
C) Accrual Accounting – The matching principle of expenses to revenue mandates the recording of the allocation amount to the transportation expense accounts. Since this formula and calculated value is derived during the month-end closing process, the actual entry date is physically the first week of the following month, but the entry is back dated to the prior period’s last day.
Notice with the above the employee pays $91.56 for a transportation benefit of $408.22 and alleviates the employee from having to purchase his/her own private vehicle? Overall, it is best to be accurate and collect the employee’s amount of taxes due during the following payroll run the next month. This method even works for the final month of a calendar year. This benefit is included in the wages of the employee. The employee simply has an amount payable to his employer as recorded in employee receivables.
Reconciliation to Forms 941 and W-2
Since this benefit is comparable to traditional pay it is included in the value for both FICA and income taxable wages. Many employers include a separate line of information in Block 14 of the W-2 identifying the total amount of each benefit included in the gross wages of the employee.
By using both the transportation account report filtered to the employee’s vehicle along with the spreadsheet, the payroll clerk/accountant should be able to reconcile this benefit to the quarterly 941 reported amount and the annual W-2’s.
The transportation benefit is reserved for owners, top-level managers and the company’s key employees. The IRS scrutinizes this benefit due to historical abuse. This abuse includes providing transportation to family members, spouses and dependents. Most often the company excluded the personal miles driven being assigned to the benefactor’s income. The penalty associated with abuse is either non-deductibility of any transportation expense and/or financial fines. The IRS always looks at the underlying supporting documents and the necessity of having or providing transportation to employees.
Documentation must include mileage logs, verification of business miles driven and the allocation formula along with inclusion of the benefit as taxable compensation to those employees that receive the benefit.
Necessity stems from the nature of the business. A contractor with three project managers warrants four vehicles with an allocation of business and personal miles. A dental practice has no justification for a vehicle or for any mileage allocation. The practice can simply reimburse the dentist(s) or staff members for business miles driven at the mileage reimbursement rates. Example of justifiable mileage reimbursements include:
- Office Supply Runs
- Miles Driven to Training Classes/Forums
- Emergency Calls
- Miles Driven for Legal/Accounting Meetings
Consult with the company’s CPA and the IRS website for guidance in substantiating the need of providing the benefit and the proper documentation methods.
Summary – Employer Provided Vehicle
The employer-provided vehicle is an appropriate benefit for owners, managers and key individuals. The Internal Revenue Service allows this benefit in certain industries as long as it is warranted by the position and documented appropriately.
Documentation includes the use of mileage logs and spreadsheets to detail the use of expenses for the vehicle. All costs are pooled as a single value for that vehicle and allocated to the employee based on personal miles driven as a ratio of total miles driven. This allocation is subtracted from total transportation expenses using a contra account and assigned as a labor expense in the sub-account ‘Benefits’. The accountant runs a special payroll to include this value in the employee’s compensation package thus making the benefit taxable for both FICA and income taxes.
The accountant is responsible to enter expenses in the books of record and allocate transportation expenses between the employer and employee. 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.