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When you provide a vehicle to an employee for the employee's personal use, the employee is generally required to treat the value of that use as a taxable fringe benefit. As the employer, you must include the value of that personal use in the employee's wages for income and employment tax purposes.
If you provide a vehicle that is used 100 percent for your business and its use can be substantiated by your employee with acceptable evidence, then the use of the vehicle is considered a "working condition fringe benefit" and no portion of the value of the use of the vehicle need be included in the wages of the employee. Under such circumstances, you may deduct the expense of operating the vehicle.
However, when a vehicle is used for both personal and business purposes, an allocation between the two types of use is required to be made on the basis of the number of miles driven. The portion allocable to the employee's personal use is generally taxable to the employee as a fringe benefit. The portion allocable to business use is generally considered a working condition fringe benefit and is excludable from the employee's income.
For purposes of determining the value of a car provided to an employee for personal use, the general rule is that the value is equal to the amount that the employee would have had to pay a third party to lease the same or a similar vehicle, for a similar length of time, in that geographic area. In other words, the value is equal to the going rate for a lease.
For cars, there are three major alternative methods for valuing the fringe benefit. Whether or not you can use one or more of these methods depends on your circumstances. If you use one of these methods to value the amount included in the employee's paycheck as a taxable fringe benefit, you must deduct the amount as compensation to an employee (rather than deducting the cost of the vehicle as a business operating expense). Also, you cannot use any of these alternate methods if the employee in question is a "control employee." A control employee is one who is a director; an employee receiving annual pay of $195,000 or more; an employee owning one percent or more equity, profit, or capital interest in the company; or a board- or shareholder-appointed, confirmed, or elected officer of the company whose pay was more $95,000 for 2011. In 2012, this amoutn increases to $100,000 or more.