This is a common question our clients ask—and it makes sense. Company vehicles can be an attractive benefit that helps recruit and retain top talent. But tax implications and liability concerns often make business owners hesitate. Without proper planning, what seems like a generous perk can lead to compliance headaches, surprise tax bills, or insurance issues. Before handing out keys, here’s what you need to know about taxes, insurance, and compliance.
IRS Rules for Company Vehicles
If an employee benefit has value, the IRS likely wants to tax it.
When providing a vehicle, choose between an accountable or non-accountable plan. Your decision depends on how much administration you're willing to handle and who shoulders the tax burden.
Non-accountable plans are easier to manage but may result in a large tax hit for employees. Accountable plans require more tracking but reduce the employee’s tax impact. Let’s look at both.
Non-Accountable Plans: Simpler but Costly for Employees
Under this plan, the vehicle’s full value becomes immediate taxable income.
Imagine telling your star employee: “You get a $40,000 car—plus $40,000 in taxable income.” That perk can quickly turn into a problem.
A better option may be to have the employee buy the car, then reimburse them separately. In one case, an employee secured zero-interest financing, making it a win-win.
Accountable Plans: More Paperwork, Better Tax Outcome
With an accountable plan, employees must log business mileage. Business use (excluding commuting) isn’t taxable. Personal use is taxable and reported on the W-2.
Pros? No big upfront tax bill.
Cons? You need to track business vs. personal use. Thankfully, apps like MileIQ make this easier.
What About Partners or S Corp Shareholders?
For partners in a partnership, personal use is reported on the K-1 and treated as a guaranteed payment.
For S Corp shareholders owning more than 2%, personal use is taxable on their W-2—even under an accountable plan.
Insurance for Company Vehicles
All company-owned vehicles must have commercial auto insurance, not personal coverage. Commercial policies cover business use but may exclude personal driving—even commuting.
Talk to your insurance agent about coverage options and limitations.
Before Handing Over the Keys
Company vehicles can be a great benefit—but only with proper planning.
Before offering them:
Consult your tax advisor about implications for your business and employees.
Speak with your insurance agent to ensure adequate coverage and understand your liability.
The right approach depends on your situation and your tolerance for paperwork. When done correctly, company vehicles can be a valuable perk that supports a strong, loyal team. If you have any questions, please feel free to reach out to TrueBlaze Advisors.