Page 153 - Essentials of Payroll: Management and Accounting

ESSENTIALS of Payr oll: Management and Accounting
if the fair market value of the vehicle is approximately
$15,000 or less (also revised annually) and the car is driven at
least 10,000 miles per year in total. If the situation exceeds
these restrictions, then the alternative approach is to multiply
the proportion of personal miles used on the vehicle by its
annual lease value (which is a percentage of a vehicle’s fair
market value, as supplied by the IRS) and record this amount
as personal income to the employee.

Example. The president of Hot Rod Custom Modifiers, Inc. drives
a company-owned Ferrari. The value of the car is clearly beyond
$15,000, so he must record as personal income the proportion of his
personal use of the car multiplied by its annual lease value of $28,000.

The proportion of his personal use was 78 percent, so the company
must record 78 percent of $28,000, or $21,840, as his gross income
associated with his use of the car.

Reduced Interest Loans
An employer may loan money to employees.When this happens, if the

amount of the loan is greater than $10,000 and is at an interest rate less
than the Applicable Federal Rate (AFR), the difference is taxable
income to the employee. This income is subject to Social Security and
Medicare taxes, but not income tax withholding. The current AFR is
available on the IRS web site at www.irs.gov or by calling 800-829-1040.
Example. An employer loans $1,000,000 to one of its officers so the
individual can purchase a new home. The stated interest rate on the
loan is 3 percent, while the AFR is 7 percent. The amount of income
reportable by the employee is the 4 percent difference between the two

rates, or $40,000.

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