Deducting vehicle expenses and recognizing its value

Use value is an amount that is recognized as income for an employee that received a vehicle from his employer. The use value is supposed to reflect the benefit to the employee contained in private use of the vehicle, which is put at his disposal by the employer, and which is taxable as an addition to the employee's salary.

Regarding vehicles that came onto the road before the end of 2009, (the year is indicated on the vehicle license), the use value is set according to the price group classification of the vehicle on its license.

Regarding vehicles which came onto the road after 1.1.2010, the use value is set as a certain percentage (which today stands at 2.5%) of the adjusted price of the vehicle to the consumer, which the Tax Authority publishes annually as part of a list of all the vehicles available in Israel, and the value it gives to each and every vehicle.

According to the current law, there is an absolute obligation to recognize the value of the vehicle as part of the salary of the employee at whose disposal the vehicle has been placed by his employer. Income tax examines the subject as part of auditing deductions that have been made at companies.

As part of the auditing, income tax requires receipt of full details of all vehicles at the company during the years it is examining, to which employees each vehicle was assigned, and what was the value recognized for it.

Due to the fact that income tax's computer systems are directly linked to the licensing office's registrations, income tax can easily check if the value has been recognized according to law. If the value has not been recognized according to law, then income tax can issue an appropriate assessment, including interest and inflation-linked payments, and impose fines for the tax differences in the value of the vehicle that has not been recognized by law.

Therefore, it is advisable that every company that puts vehicles at the disposal of its employees, records full documentation on an ongoing basis, because if during auditing deductions the company fails to reproduce all the exact data to income tax, it will have the authority to issue a debt assessment according to the best of its judgment. It is important to point out that expenses that are currently paid by the employer for maintaining a vehicle that is at the disposal of the employee are allowed to be fully deducted, even if the value set in law is not fully recognized. It is also appropriate to mention that there is an option in law not to recognize the use value for the employee, if the vehicle is defined as an "operating vehicle." This type of vehicle is a vehicle that only serves the needs of the employer and after work hours the vehicles does not leave the place of employment.

Therefore, for a vehicle that serves during the day to carry goods or equipment and remains at the end of the day in the confines of the business, the value is not recognized, despite the fact that during the day the vehicle was with the employee.

To prove that a certain vehicle is not an operations vehicle, it is advisable to make the employees using it sign that they are not permitted to use the vehicle outside of work hours, and that they are committed to return the vehicle at the end of the day to the business's car park and take it out again the following day.

According to a ruling that was recently handed down by the District Court, it was determined that even if an employee uses his own private vehicle for the employer for work purposes, refunding expenses for such travel (that is generally calculated according to an average cost per kilometer) is a reimbursement that is tax exempt for the employee. For example, an employee in a real estate appraiser's firm who travels in his private vehicle in order to check out a certain building in order to assess its value for the firm in which he works, will be exempt from tax on the reimbursement expenses that he receives from the appraiser's firm in which he works.

The employee will not required to have the value recognized following the payment of business expenses by the employer, just as if the employee had travelled in a taxi to check out the same building and would have received reimbursement for the taxi far from the employer's petty cash. Of course the appropriate documentation must be kept to prove that the employee's journey in his private vehicle was carried out for the purposes of the business.

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