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IRS Offers COVID-19-Related Relief for Valuing Personal Use of Employer-Provided Vehicles


· 5 minute read


· 5 minute read

IRS Notice 2021-07 (Jan. 4, 2021)

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The IRS has announced temporary COVID-19-related relief for employers and employees using the automobile lease valuation rule to determine the value of an employee’s personal use of an employer-provided automobile. In general, employers using the automobile lease valuation rule must start using it on the first day the automobile is made available to an employee for personal use and for all subsequent years (the commuting valuation rule may be substituted in certain circumstances). A similar consistency rule applies to the vehicle cents-per-mile rule. This notice provides relief from both consistency rules, allowing employers and employees using the automobile lease valuation rule to switch to the vehicle cents-per-mile rule beginning as of March 13, 2020—subject to the general rule that the vehicle cents-per-mile rule may not be used for vehicles with a fair market value above the $50,400 inflation-adjusted threshold for 2020 (see our Checkpoint article). The relief is available if, at the beginning of 2020, the employer reasonably expected the automobile to be regularly used in its trade or business throughout the year, but the automobile was not used that way due to the COVID-19 pandemic.

For the 2020 calendar year, an employer making this switch must prorate the vehicle’s value under the automobile lease valuation rule by multiplying the applicable Annual Lease Value by 72/365 (representing the period from January 1 through March 12, 2020). Employees whose employers switch to the vehicle cents-per-mile rule must make the same switch. The notice includes guidance on reporting, withholding, and seeking adjustments or refunds for overpayment of federal employment taxes resulting from the change.

For the 2021 calendar year, employers that switched methods for 2020 may continue to use the vehicle cents-per mile rule or may revert to the automobile lease valuation rule (so long as the requirements for using the chosen method—other than the consistency rules—are met). Thereafter, the consistency rules will be applied as if January 1, 2021, was the first day of personal use or the day the vehicle was first available for personal use (depending on the applicable rule). Thus, the valuation method used for the 2021 calendar year generally must be used for all subsequent years. Employees must continue to use the same method as the employer (unless the employer uses the commuting valuation rule).

EBIA Comment: The notice explains that, due to decreased vehicle use resulting from the COVID-19 pandemic, the vehicle cents-per-mile rule more accurately reflects the income attributable to an employer-provided vehicle. This is because the vehicle cents-per-mile rule values only the employee’s personal use and does so at a flat rate. The lease valuation rule, however, establishes a vehicle’s full lease value, all of which is treated as income to the employee except to the extent the vehicle is used for business and that portion of the value can be excluded as a working condition fringe benefit. If total usage drops, the attributed income per mile of personal use rises under the lease valuation rule, and if business use drops disproportionately, that effect is exacerbated. Accordingly, employees may benefit from the switch. Employers considering the switch should review the details of the relief, including the overpayment correction guidance, and must determine which method to use for 2021 and beyond. For more information, see EBIA’s Fringe Benefits manual at Section IV.C (“How Do the Working Condition Fringe Rules Apply to Company Cars?”).

Contributing Editors: EBIA Staff.

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