As we come out of tax season, we always encounter a few things that are worth following up with our automotive clients. Demonstrators (“demos”) are a great place to start. We understand that dealers seem to be getting away from using this benefit, but we want to make sure that dealers that are still providing demos for personal use by employees, report these benefits correctly.
Personal use of a demo by an employee is considered a fringe benefit and is taxable as compensation. For an employee’s personal use of a demo to qualify to not be included in compensation, that employee would need to qualify for a special “full exclusion” method, which is very strict. If an employee does not qualify for the full exclusion method, the amount of the personal use benefit should be added to an employee’s Form W-2. The amount of the compensation to be included depends on the employee and their job description. Please consider all employees in evaluating demo use for compensation including the owner and spouse.
In addition to the federal tax treatment of this benefit, you also need to consider the state tax treatment, since it varies by state. Pennsylvania law currently does not tax this benefit. On the other hand, Ohio follows federal law and would tax the benefit.
Also keep in mind documentation for your dealership’s demo use. This is one of the most overlooked items. We suggest being proactive with your documentation which can save a headache later. Revenue Procedure 2001-56 goes into detail regarding adequate records for this documentation.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.
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