When the University provides a vehicle for work, it is considered a working condition fringe benefit under IRS rules. If the vehicle is used only for University business, its value is not taxable.
If the vehicle is used for personal reasons, part of its value becomes taxable income. Personal use includes commuting to and from work and any use not related to University business.
These rules apply whether the vehicle is owned by the University or provided through a third party (such as a dealership or foundation).
Calculating Taxable Personal Use
The IRS requires the fair market value of personal use of a University-provided vehicle to be added to the employee’s wages and taxed. Limited, infrequent personal use of a fleet or occasionally provided vehicle may qualify as a de minimis fringe benefit and is not taxed.
The University uses the Annual Lease Value (ALV) Method to calculate taxable personal use.
Annual Lease Value
Taxable personal use is calculated as the annual lease value (ALV) multiplied by the percentage of personal miles. The annual lease value already includes the value of insurance and maintenance. These costs should not be added again if paid or reimbursed by the University. If an employee personally pays for insurance or maintenance, those costs do not reduce the taxable amount.
- Determine the vehicle’s fair market value (FMV): The same FMV is used in future tax years while the employee keeps the vehicle, up to four years. After four calendar years, both FMV and AMV must update to reflect the vehicle’s reduced value.
- New vehicles: Required sales tax and title fees and either 92% of the manufacturer’s suggested retail price, or 104% of the manufacturer’s invoice price.
- Used vehicles: Use the “private party” value from Kelley Blue Book, plus required sales tax and title fees.
- Find the Annual Lease Value (ALV): Match the vehicle’s FMV to the corresponding ALV in the (Publication 15-B, PDF).
- Adjust for partial-year availability, if needed: If the vehicle was available for less than a full calendar year, prorate the ALV (divide days available by 365; vacation and sick do not count as unavailable days).
- Apply the personal-use percentage: Multiply the ALV by the percentage of miles driven for personal use. The result is the taxable amount reported to Payroll.
Example
An employee is provided a used vehicle for the full year.
- Personal use: 17%
- Fair market value (including taxes and fees): $21,900
- IRS Annual Lease Value: $5,850
Taxable amount: 17% × $5,850 = $994.50 reported as taxable income.
Mileage Tracking and Reporting
Employees must track all miles drive, time and place of travel and official business purpose. Any miles not documented as business use are treated as personal and taxed.
Division fiscal officer are responsible for verifying business mileage and reporting taxable personal use to UM System Central Payroll:
- Reporting period: November 1 – October 31
- Report to payroll: Due November 15
Taxable amounts are added to the employee’s remaining paychecks for the year.
Reimbursements and Other Expenses
If the vehicle has personal use, reimbursements must be split using the same business-versus-personal mileage percentage. The taxable portion is added to the amount calculated under the ALV method. Reimbursements are not taxable if the vehicle is used entirely for business.
Because the ALV already includes maintenance and insurance, these expenses should not be included again when calculating taxable personal use.