So has the city been issuing W2s to the employees who use these vehicles?
Straight from the IRS
http://www.irs.gov/pub/irs-tege/public_employers_outreach_guide.pdfGovernment-Owned Vehicles
The personal use of a government-owned vehicle is generally a taxable fringe benefit. It may, however, be excludable as a de minimis benefit (infrequent and of little value). Personal use includes the value of commuting in a government-owned vehicle, even if the vehicle is taken home for the convenience of the employer (but see Commuting Valuation Rule, below). The value of the benefit must be included in wages, but withholding of income tax on the value of vehicle use is at the employer’s option. Social security and Medicare withholding is required.
All of your employee's use of a qualified nonpersonal use vehicle qualifies as a working condition fringe. You can exclude the value of that use from employee income. A qualified nonpersonal use vehicle is any vehicle the employee is not likely to use more than minimally for personal purposes because of its design. Qualified nonpersonal use vehicles include:
•Clearly marked police, fire, and public safety officer vehicles. The employee must be on-call, required to commute in the vehicle, and be prohibited from personal travel outside the jurisdiction.
•Unmarked vehicles used by law enforcement officers. The officer must be authorized to carry a firearm, execute search warrants and make arrests.
•An ambulance or hearse used for its specific purpose.
•Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
•Delivery trucks with seating for the driver only, or driver plus a folding jump seat.
•A passenger bus with a capacity of at least 20 passengers used for its specific purpose.
•School buses.
•Tractors and other special purpose farm vehicles.
All Other Employer-Provided Vehicles
If you provide an employee with a vehicle that does meet the qualified nonpersonal use criteria, the personal use of the vehicle is a taxable fringe benefit. It is the employer's responsibility to determine the actual value of this fringe benefit and to include the taxable portion in the employee's income.
Example: A town-owned pickup truck is marked with the town name. It is not a police, fire, or public safety vehicle, or other qualified nonpersonal use vehicle. The employee is usually allowed to take the vehicle home because he is "on call." The vehicle is not a qualified nonpersonal use vehicle, thus the commuting is a non-cash taxable fringe benefit.
Special Valuation Rules
There are three methods that can be used to determine the value of the vehicle provided to the employee:
1)Lease value rule
2)Cents-per-mile rule
3)Commuting valuation rule
1)Lease Value Rule
This method is used if neither of the rules (2) or (3) below is used. It calculates
the value of the benefit by determining the annual lease value of the vehicle, as follows:
a) Determine the fair market value of the vehicle when first made available.
b) Determine the annual lease value (ALV) from the table in Publication 15-B, which is based on a four-year lease term. This value will generally stay the same for each year. If the vehicle remains in service after four years, it must be revalued and the ALV recomputed.
c) Multiply the annual lease value by the percentage of personal miles out of the total miles driven by the employee. This is the value of the taxable benefit.
2) Cents-Per-Mile Rule
The value of the personal use of a vehicle may be figured at 55.5 cents per mile for 2012 if the following conditions are met:
a)You reasonably expect the vehicle to be regularly used in your trade or business throughout the calendar year, or
b)The vehicle meets the mileage test. To meet the mileage test, both of the following must apply:
1.The vehicle is driven at least 10,000 miles during the year by employees.
2.The vehicle is used during the year primarily by employees. Consider the vehicle used primarily by employees if they use it consistently for commuting.
Regularly used in your trade or business means:
a)At least 50% of the total annual mileage is for your business, or
b)You sponsor a commuting pool that generally uses the vehicle each workday to drive at least three employees to and from work, or
c)The facts and circumstances indicate regular use in the business.
If you do not provide fuel, you can reduce the value of the personal use by no more than 5.5 cents per mile.
To use the cents-per-mile rule, the vehicles cannot have a greater fair market value in the year placed in service than a maximum amount determined by the IRS for each year (for 2012, $15,900 for cars and $16,700 for trucks).
3) Commuting Valuation Rule
Under this rule, you determine the value of a vehicle you provide to an employee for commuting by valuing each one-way commute (home to work or work to home) at $1.50. If more than one employee commutes in the vehicle, this value applies to each employee. Unless the employee reimburses this amount to the employer, the amount is included in the employee’s wages. This rule may be used if all of the following apply:
a) You own or lease the vehicle and provide it to an employee to use in your business,
b) For bona fide noncompensatory business reasons, you require the employee to commute in the vehicle,
c) You establish a written policy allowing no personal use other than commuting or de minimis personal use (such as a stop for personal errand),
d) Your employee does not use the vehicle for personal purposes other than commuting and de minimis personal use, and
e) The employee is not a government control employee. A government control employee is either (i) an elected official, or (ii) an employee whose pay is at least Federal Government Executive Level V ($145,700 for 2012).
Example: An employee takes a city vehicle home in order to avoid exposing it to harm. The vehicle has a city seal on the door and policy prohibits noncommuting personal use. If this is an infrequent occurrence (less than once a month) this may be excludable as a de minimis fringe benefit. If this is a frequent or regular occurrence, the commuting may be valued using the commuting rule because there is a noncompensatory business purpose for the employee
taking the vehicle home. If the vehicle is not a qualified nonpersonal use vehicle as discussed earlier, and the employee drives it home, there is a taxable commuting benefit.
To conform to the accountable plan rules, employees using a vehicle for business purposes (regardless of which special valuation rule is used) should keep daily records of business miles by keeping a log containing the following information:
a)Date
b)Mileage (beginning and ending)
c)Destination
d)Business purpose
e)Personal use mileage
f)Commuting mileage
Logged
