The free use of a company car is one of the best perks an employee may receive as part of a compensation package. But the benefit to the employee isn’t completely “free” under current tax law. Essentially, personal use of a company car is treated as a taxable noncash fringe benefit, subject to income tax obligations.
The maximum value of an employer-provided vehicle (including cars, vans and trucks) first made available to employees for personal use in calendar year 2019 for which either the vehicle cents-per-mile valuation rule or fleet-average valuation rule may be used is $50,400. (IRS Notice 2019-34)
Personal Use Value
If an employer provides a car to an employee that’s available for personal use, the value of the personal use must generally be included in the employee’s income and wages. The personal use may be valued using the cents-per-mile or fleet-average valuation rules for the 2019 calendar year.
Due to tax law changes in the Tax Cuts and Jobs Act (TCJA), the maximum dollar limitations on the depreciation deductions for passenger automobiles significantly increased and the way inflation increases are calculated changed. Earlier IRS guidance (Notice 2019-8) stated that the IRS and the Treasury Department intended to amend regulations to incorporate a higher base value of $50,000 to be adjusted annually. This amount applied for 2018, according to Notice 2019-8. (The maximum amount provided currently by regulation is $16,500, adjusted annually for inflation.)
The new IRS notice provides that for 2019, the maximum fair market value (FMV) of a vehicle (including cars, vans and trucks) for use with the vehicle cents-per-mile and fleet-average valuation rules is $50,400.
Because current regulations haven’t yet been updated to reflect the changes under the TCJA, the IRS provides relief to taxpayers in the form of interim guidance for 2019 in the notice. The IRS intends (along with the Treasury Department) to revise the regulations.
The IRS anticipates that when the regulations have been amended, the maximum value for use of the cents-per-mile and fleet-average valuation rules will be published annually with the standard mileage rates for business, charitable, medical and moving expense purposes.
Until revised final regulations are published taxpayers may rely on the interim guidance provided in Notice 2019-34. The IRS is requesting comments on the new guidance by July 29.
For some employers, a company-provided car is a way to attract and retain key employees. But it’s important to address all the payroll tax complexities relating to the personal use of a vehicle. With assistance from your tax and payroll advisors, employers can adhere to the tax law guidelines and meet all the reporting requirements.
Warm weather and rainy days bring the urge to purge. But before you clean your file cabinets or declutter your computer files, it’s important to review these guidelines.
Federal Tax Records
Most tax advisors recommend that you retain copies of your finished tax returns indefinitely to prove that you actually filed. Even if you don’t keep the returns indefinitely, hold onto them for at least six years after they’re due or filed, whichever is later.
|Guidelines for Small Businesses|
The retention guidelines are slightly different for small business records. Here are some best practices to consider.
Records used to substantiate the cost and deductions (such as depreciation, amortization and depletion) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines.
For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations.
Sales Tax Returns
State regulations vary. For example, New York generally requires sales tax records to be retained for three years, while California requires four years, and Arkansas, six. Check with your tax advisor.
Employee and Payroll Records
Keep personnel records for three years after an employee has been terminated. Also maintain records that support employee earnings for at least four years. This time frame should cover various state and federal requirements. However, never throw away records that might involve unclaimed property, such as a final paycheck not claimed by a former employee.
Time cards specifically must be kept for at least three years if your business engages in interstate commerce and is subject to the Fair Labor Standards Act. However, it’s a best practice for all businesses to keep the files for several years in case questions arise.
Keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer.
Important: The more records you store, the greater the likelihood that your data will be stolen or hacked. Destroying sensitive documents and files can reduce the chances that you or your company’s employees and customers will become identity theft victims.
It’s a good idea to keep records that support items shown on your individual tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. Examples of supporting documents include canceled checks and receipts for alimony payments, charitable contributions, mortgage interest payments and retirement plan contributions. You can also file an amended tax return during this time frame if you missed a deduction, overlooked a credit or misreported income.
Which records can you throw away today? You can generally throw out records for the 2015 tax year, for which you filed a return in 2016.
You’re not necessarily safe from an IRS audit after three years, however. There are some exceptions to the three-year rule. For example, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there’s suspicion of fraud or you don’t file a tax return at all, there’s no time limit for the IRS to launch an inquiry.
In addition, records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses for federal disasters, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.
There are also some cases when taxpayers get more than the usual three years to file an amended return. For example, you have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items.
State Tax Records
The previous guidelines are all geared toward complying with federal tax obligations. Ask your tax advisor how long you should keep your records for state tax purposes, because some states have different statutes of limitations for auditing tax returns.
Plus, if you’ve been audited by the IRS, states generally have the right to resolve their own issues related to that tax year within a year of the federal audit’s completion. So, hold on to all tax records related to an IRS audit for a year after it’s completed.
Essential Personal Records
Your files probably contain more than just tax information. Certain essential documents should be kept indefinitely. Examples include:
- Birth and death certificates,
- Marriage licenses and divorce decrees,
- Social Security cards, and
- Military discharge papers.
These should be kept in a safe location, such as a locked file cabinet or safety deposit box. If stolen, essential documents can be used to steal your identity. In turn, a stolen identity can be used to file for bogus tax refunds or apply for credit under your name.
Bills and Receipts
In general, it’s OK to shred most bills — like phone bills or credit card statements — when your payment clears your bank account or at year end. However, if a bill or receipt supports an item on your tax return, follow the tax guidance above.
If you purchase a big-ticket item — like jewelry, furniture or a computer — keep the bill for as long as you have the item. You never know if you’ll need to substantiate an insurance claim in the event of loss or damage.
Real Estate Records
Keep your real estate records for as long as you own the property, plus three years after you dispose of it, and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims and documents relating to refinancing.
These documents help prove your adjusted basis in the home, which is needed to figure any taxable gain at the time of sale. They can also support calculations for rental property or home office deductions.
Investment Account Statements
To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, and dividend reinvestment and investment expenses, such as brokers’ fees. It’s a good idea to keep these records for as long as you own the investments, plus until the expiration of the statute of limitations for the relevant tax returns.
Likewise, the IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned.
If an account is closed, treat IRA records with the same rules that apply to stocks and bonds. Don’t dispose of any ownership documentation until the statute of limitations expires.
Before you clear your files of old financial records, discuss the records retention requirements with your tax advisor. You don’t want to be caught empty-handed if an IRS or state tax auditor contacts you.
In the not-so-distant past, employers hand-delivered paychecks to employees. Employees then cashed their checks or deposited the money in checking accounts. Today, most employers use direct deposit, or, in a more recent development, payroll cards (or paycards).
In January 2019, the Consumer Financial Protection Bureau (CFPB) finalized regulations governing prepaid accounts, including payroll cards. Notably, the CFPB has modified earlier regulations about error resolution and liability limits when financial institutions haven’t successfully completed consumer identification and verification procedures. These new regulations take effect April 1, 2019.
What Do the Numbers Say?
In 1986, only 8% of workers were paid through direct deposit, according to the National Automated Clearing House Association (NACHA). By 2000, that number exceeded 50%, and it reached 82% in 2015. This upswing mirrors a broader economic trend of increasing use of electronic payments.
As recently as 2017, consulting firm Aite Group, estimated that 5.9 million active payroll cards around the country were loaded with wages of $42 billion. Those figures are expected to skyrocket to 8.4 million cards, with $60 billion loaded by 2022. In contrast, approximately 2.2 million workers currently receive wages by paper check.
How Do The Cards Work?
Payroll cards, similar to prepaid debit cards, act like portable bank accounts. With each weekly or bi-weekly pay period, employers deposit employees’ wages directly onto cards. Employees can then use their card for purchases at retail outlets and for cash withdrawals and online bill payments.
The funds are “located” elsewhere, in a bank or other financial institution account. Typically, funds are protected by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
Younger workers and employees in lower tax brackets are the demographics most commonly compensated with payroll cards, according to a 2018 study from the Center for Financial Services Innovation (CFSI). And the retail, manufacturing and fast-food industries are the most likely to pay workers using payroll cards.
What Are the Benefits?
Payroll cards can provide some distinct advantages over paper checks to both employers and employees. The most obvious advantages for employers are ease and convenience. Businesses save time and money because they no longer have to print and deliver checks to employees. They also don’t have to worry about misplaced or stolen checks.
Employees who don’t have bank accounts typically welcome payroll cards. They can make purchases wherever their card’s issuer (such as Visa or Mastercard) is accepted and don’t have to pay the high fees charged by check-cashing services. Employees who do have bank accounts can also benefit. With payroll cards, there are no monthly or bounced check fees or overdraft consequences.
Unlike with traditional credit cards, payroll cardholders don’t need a good credit history to qualify. They’re also protected by liability limits and error-resolution procedures in the event their cards are lost or stolen.
Are There Drawbacks?
Fees are the major downside of payroll cards. For example, employees may be charged fees to:
- Participate in their employer’s payroll card program
- Check an account balance at an ATM
- Use certain customer service features
- Make point-of-sale transactions in retail stores or online
- Request an initial card or replacements, and
- Close the account and request a refund of remaining account funds
In addition, fees can be assessed if a cardholder keeps too low a balance or doesn’t use the card often enough.
How Do Regulations Protect Cardholders?
In 2016, the CFPB began developing the rules that will take full effect this year. Payroll card providers must adhere to cardholder disclosure requirements and document fees and conditions on a short or long disclosure form. The short form is standardized and generally easier for users to understand. The long form provides more comprehensive information about the card program.
The CFPB requires that the number and types of fees charged to cardholders are prominently disclosed to employees before they enroll in a payroll card program. This includes fees for ATM balance inquiries, customer service requests and inactivity.
Before You Adopt
Payroll cards are popular with certain employers and employees for good reason. If you’re considering adopting a payroll card program, carefully weigh the benefits and drawbacks and familiarize yourself with regulations governing their use.