Tax Rules for Personal Miles on a Company Vehicle
Driving a company car for personal reasons is a taxable benefit. Learn how its value is determined and added to your W-2 as reportable income.
When a company provides an employee with a vehicle, any personal travel is considered a taxable, non-cash fringe benefit. This arrangement comes with specific tax obligations for the employee, and the Internal Revenue Service (IRS) has established rules for how the value of this personal use is determined and reported. The value of this benefit must be calculated and included in the employee’s taxable income.
Differentiating Business and Personal Use
The foundation of company vehicle tax rules lies in distinguishing between business and personal mileage. The IRS defines business use as travel that is ordinary and necessary for conducting your employer’s business, such as trips to a client’s location, between company work sites, or to a temporary work location. Any use of the vehicle that is not for a substantiated business purpose is classified as personal use.
A primary point of clarification is the treatment of commuting. Travel from an employee’s home to their main place of work is considered a personal commute, not a business trip. This remains true even if the employee performs work-related tasks during the commute, such as making business calls. The drive from the last business stop of the day back home is also personal use.
An exception exists for “de minimis” personal use, which refers to minor and infrequent personal stops that do not significantly add to the length of a business trip. A brief stop for coffee on the way to a client meeting is an example. However, a significant detour for groceries on the way home from an appointment would be classified as personal use.
Recordkeeping Requirements for Employees
To properly separate business from personal use, employees are required to maintain detailed and timely records. The IRS requires an “adequate record” to substantiate the business use of a company vehicle; without it, all use could be considered personal and fully taxable.
An adequate record, such as a contemporaneous mileage log, must document specific details for each business trip, including:
- The date of the trip
- The total miles driven, often with starting and ending odometer readings
- The destination of the travel
- The specific business purpose, such as “Meeting with XYZ Corp client,” as simply stating “business” is insufficient
These records can be maintained in various formats, including a physical logbook, a diary, or a digital spreadsheet, but they must be created at or near the time of travel. Maintaining these logs is the employee’s responsibility and provides the data for the employer to accurately calculate personal use.
Employer Valuation Methods
Once an employee provides records detailing their mileage, the employer must calculate the value of the personal use to include in the employee’s income. The IRS provides several methods for this valuation, and the employer chooses which one to apply.
Annual Lease Value Rule
The Annual Lease Value (ALV) method determines the value based on what it would cost to lease a similar vehicle. The IRS provides a table that assigns an annual lease value based on the vehicle’s fair market value when it was first made available. This annual value is then multiplied by the percentage of personal miles driven. For example, if a car with an ALV of $8,000 is driven 25% for personal reasons, $2,000 is added to the employee’s income.
Cents-per-Mile Rule
The Cents-per-Mile method multiplies the total number of personal miles by the standard mileage rate set by the IRS, which is 70 cents per mile for 2025. This method can only be used if the vehicle’s fair market value does not exceed a certain limit when first made available. For a vehicle first made available in 2025, that limit is $61,200 for cars, trucks, and vans. If an employee drives 2,000 personal miles, the taxable benefit would be $1,400.
Commuting Valuation Rule
The Commuting Rule is a specialized method that allows an employer to value each one-way commute at a flat rate of $1.50. To use this method, the employer must have a written policy prohibiting personal use other than commuting and de minimis stops. This option is not available for “control employees,” such as company directors or officers. If an employee has 200 one-way commutes in a year, the taxable income would be $300.
Tax Reporting and Withholding
After the employer calculates the value of personal use, this amount must be treated as additional compensation. This non-cash fringe benefit is subject to federal and state income taxes, as well as Social Security and Medicare (FICA) taxes. The employer is responsible for withholding these taxes from the employee’s regular paychecks.
The total value of the personal use is reported on the employee’s annual Form W-2. This amount is included in the total wages reported in Box 1, Box 3, and Box 5. Employers may also provide a separate notation in Box 14, labeling the amount as “Auto” or “Personal Use of Company Vehicle” for informational purposes.
This inclusion increases the employee’s taxable income for the year. The employee does not need to take any special action on their personal tax return, as the income has already been accounted for on their W-2.