Question

An employee will not receive a company car, but will be provided with an interest free loan from the company to purchase a personal one. He receive an allowance of $0.51 per kilometre for employment driving. What are the tax implications of this note, if any?

Answer 1

Any interest free loan received by employee from employer is taxed using imputed interest rate. Imputed interest rate comes into play when the interest rate at which the lendor lends money to borrower at the rate less than Applicable Federal Rate (AFR). The AFR will be taken as Imputed interest rate in such case and difference between actual interest rate and imputed interest rate is taken as income for the borrower.

But that has a exception when the loan amount is less than $10,000 and employer can prove the purpose of such loan is not to avoid tax.

If in the given case, the loan amount is less than $10,000 it will be exempted in the hands of employee. Otherwise the loan will be taxed using Applicable Federal Rate in the hands of employee.

The car allowance of 51 cents per kilometre i.e., 82.126 cents per mile. As per IRS, the standard mileage rate is 57.5 cents per mile. In the given case it is not reimbursement but car allowance. So the standard mileage rate is of no use. Also Accountable plan is not applicable, non accountable plan is applicable. Under this non accountable plan, the car allowance is treated as income and tax is to be withholded from the payments made to employees by employer.