The Annual Lease Value Table for Employer-Provided Autos
Providing a company car creates a taxable benefit. Understand the employer's compliance steps for calculating and reporting its value on an employee's W-2.
When an employer provides an automobile for an employee’s use, it is considered a non-cash fringe benefit. The Internal Revenue Service (IRS) requires that the value of any personal use of this vehicle be quantified and included in the employee’s gross income for tax purposes. One of the established methods for determining this value is the Annual Lease Value method.
This approach provides a structured way for employers to assign a monetary value to the benefit an employee receives from having a company car available for personal trips. The personal use of a company vehicle is a taxable perk, which includes activities such as commuting, running personal errands, or using the vehicle for a vacation. The IRS provides specific guidelines and tables to facilitate this valuation.
Determining the Annual Lease Value
The first step in applying the Annual Lease Value method is to determine the vehicle’s Fair Market Value (FMV). This valuation must be done on the first date the automobile is made available to the employee for personal use. For a vehicle purchased by the employer, the FMV is the price paid in an arm’s-length transaction. If the vehicle is leased, the employer can use a nationally recognized pricing guide to establish the retail value.
Once the FMV is established, the employer consults the Annual Lease Value table provided by the IRS in Publication 15-B, Employer’s Tax Guide to Fringe Benefits. This table lists ranges of vehicle FMV and their corresponding Annual Lease Value (ALV). For example, if a car’s FMV is determined to be $25,500, the employer would find the range “$25,000 to $25,999” in the table, which corresponds to an ALV of $7,250.
This ALV figure from the table represents the value of the vehicle being available for an entire calendar year. It is a baseline amount that includes the value of maintenance and insurance provided by the employer. The value of employer-provided fuel is not included in this initial ALV and must be accounted for separately.
Calculating the Taxable Personal Use Value
After determining the Annual Lease Value (ALV), the employer calculates the portion of that value attributable to the employee’s personal use. This requires record-keeping of all miles driven in the vehicle. The employer must track the total miles the vehicle was driven during the year and the number of miles driven by the employee for personal reasons. Without adequate records distinguishing business from personal use, the IRS may consider 100% of the vehicle’s availability as a taxable benefit.
The formula to find the taxable income amount is to divide the number of personal miles by the total miles driven and multiply the resulting percentage by the ALV. For instance, if an employee drives a total of 20,000 miles in a year, with 6,000 of those being for personal trips, the personal use percentage is 30%. If the vehicle’s ALV is $7,250, the amount to be included in the employee’s income is $2,175.
Because the Annual Lease Value does not include fuel, the value of any fuel provided by the employer must be calculated separately and added to the employee’s income. Employers can determine this value by using its fair market value (the actual amount paid) or by applying a standard rate for all miles driven. The IRS allows for a rate of 5.5 cents per mile for this purpose.
Proration and Special Circumstances
The standard calculation assumes the vehicle is available to the employee for the entire year. If a vehicle is available for a continuous period of at least 30 days but less than the full year, the Annual Lease Value must be prorated. The proration formula involves multiplying the ALV by a fraction: the number of days of availability divided by the number of days in the year. For example, if a car with an ALV of $7,250 was available for 200 days, the prorated lease value would be approximately $3,973.
An important rule employers must follow is the “four-year lease term” rule. The FMV determined on the first day the car is available must be used to find the ALV for a period of four full calendar years. This means the employer continues to use the original ALV for calculation purposes during this term, even as the car’s actual market value depreciates. At the start of the fifth year, the employer must redetermine the vehicle’s FMV and its corresponding ALV.
Reporting and Withholding Requirements
Once the final taxable value of the personal use is calculated, the employer must report this amount and withhold the appropriate taxes. This non-cash fringe benefit is considered part of the employee’s wages and is subject to federal income tax withholding as well as Social Security and Medicare taxes (FICA). The employer must include the calculated value in the employee’s total compensation.
This amount is reported on the employee’s Form W-2. The value is included in the totals shown in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips). Many employers also choose to identify the amount separately in Box 14 (Other) for clarity, with a description like “Auto Fringe.”
Employers have flexibility in the timing of these withholdings. Under a special accounting rule, an employer can elect to treat the value of personal use occurring in the last two months of the calendar year (November and December) as if it were paid in the following year. This choice, however, must be applied consistently.