School-provided Automobiles for Heads of Independent Schools

Understanding the Tax Implications and Pros and Cons of Employer-Provided Vehicles for Heads of School

As a Head of School, your compensation package often includes unique benefits, such as an employer-provided vehicle. However, it’s crucial to understand the tax implications that come with such perks, particularly when it comes to balancing personal and professional use of the car.

Here, we’ll explore the rules surrounding the personal vs. professional use of employer-provided cars and break down the guidelines from the IRS to help you avoid surprises come tax season.

The General Rule: Reimbursement for Personal Use

If your employer provides a vehicle, any personal use of that vehicle typically requires reimbursement to the school. This reimbursement is generally paid with post-tax dollars, meaning it becomes taxable income. Based on IRS guidelines (IRS Publication 15-B and Topic 510), personal use includes non-business-related activities, such as driving your children to school or running errands, like grocery shopping.

While these activities may be convenient because you live on campus, they are still considered personal use from a tax perspective, and it's crucial to reimburse the school accordingly.

How to Calculate Reimbursement: Standard Mileage Rate vs. Actual Expenses

You have two main options for calculating the reimbursement owed for personal use of the school-issued vehicle:

1. Standard Mileage Rate

The IRS allows you to use the standard mileage rate of $0.655 per mile (as of 2023). This can be a cost-effective method, especially if you are driving a high-end, late-model car. However, there are specific conditions you must meet to use this method. The school must:

• Own or lease the car.

• Not operate a fleet of five or more cars.

• Have not claimed depreciation using any method other than straight-line.

• Have not claimed a Section 179 deduction on the car.

• Have not claimed special depreciation or actual expenses in the past for leased vehicles.

2. Actual Expense Method

Alternatively, you can use the actual expense method, which requires you to calculate all costs associated with the vehicle's operation (e.g., fuel, maintenance, insurance, registration, and depreciation) and apply this to the portion of miles driven for personal use. This method may offer a more accurate reflection of your car-related expenses but involves much more detailed record-keeping.

An Example

The standard mileage rate is typically well below the actual cost per mile to own, insure, and operate a vehicle. Let’s take for example a fairly milquetoast Head of School car choice as an example, such as Volvo XC90 plug-in hybrid SUV, which retails for $70,000 to $80,000.

Using the Volvo as an example, the actual per-mile cost of owning such a vehicle under a typical 3-year lease, assuming 12,000 miles driven per year, is approximately $1.25/mile. The costs included lease payments, insurance, fuel, service plans, a new set of tires, and more. Here's a breakdown:

Estimated Actual Per Mile Cost for Volvo XC90 Ownership
Lease Payments$32,400($0.90/mile)
Service Plan $1,500 ($0.04/mile)
Insurance $4,500 ($0.12/mile)
Inspection & Registration $450 ($0.01/mile)
Gasoline $4,200 ($0.12/mile)
New Tires $1,200 ($0.03/mile)
Windshield Replacement $500 ($0.01/mile)
Total Estimated Cost $44,750 ($1.24/mile if operated all gas)

Note, this total would be $1.16/mile if operated all-elecrtic and assuming an electric cost of $0.14 per kWh

As you can see, the true cost per mile of operating a Volvo XC90 comes out to approximately $1.16-$1.24 per mile. In contrast, the IRS standard mileage rate for reimbursement is $0.655 per mile—considerably lower than the actual cost of the car's ownership and operation.

Conclusion: Navigating the Tax Landscape

Navigating the tax implications of employer-provided vehicles can be challenging, especially when trying to balance personal and professional use. While living on campus may blur the lines between personal convenience and professional requirements, the IRS maintains clear rules about how such benefits are taxed. To minimize your tax liability, it's essential to carefully track and reimburse the school for any personal use of the vehicle.