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Individual Tax

Proposed reliance regs on personal use of employer-provided vehicles

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Preamble to Prop Reg REG-101378-19Prop Reg §1.61-21

IRS has issued proposed regs, on which taxpayers may rely until the publication of final regs, regarding special valuation rules for employers and employees to use in determining the amount to include in an employee’s gross income for personal use of an employer-provided vehicle.

Background—employer-provided vehicles, generally.  If an employer provides an employee with a vehicle that is available to the employee for personal use, the value of the personal use must generally be included in the employee’s income under Code Sec. 61. In addition, benefits paid as remuneration for employment, including the personal use of employer-provided vehicles, generally are also wages for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA) and federal income tax withholding. (Code Sec. 3121(a)Code Sec. 3306(b), and Code Sec. 3401(a))

Background—the vehicle cents-per-mile rule. For employer-provided vehicles made available to employees for personal use that meet the requirements of Reg. § 1.61-21(e)(1), generally the value of the personal use may be determined under the vehicle cents-per-mile valuation rule of Reg. § 1.61-21(e). However, Reg. § 1.61-21(e)(1)(iii) currently provides that the value of the personal use may not be determined under the vehicle cents-per-mile valuation rule for a calendar year if the fair market value of the vehicle on the first date the vehicle is made available to the employee exceeds a base value of $12,800 that is adjusted annually under Code Sec. 280F(d)(7).

Reg. § 1.61-21(e)(5)(i) states that an employer must adopt the vehicle cents-per-mile valuation rule by the first day on which the vehicle is used by an employee of the employer for personal use (or, if the commuting valuation rule of Reg. § 1.61-21(f) is used when the vehicle is first used by an employee of the employer for personal use and the employer switches to the vehicle cents-per-mile valuation rule, the first day on which the commuting valuation rule is not used). Reg. § 1.61-21(e)(5)(ii) provides that once the vehicle cents-per-mile valuation rule has been adopted for a vehicle by an employer, the rule must be used by the employer for all subsequent years in which the vehicle qualifies for use of the rule, except that the employer may, for any year during which use of the vehicle qualifies for the commuting valuation rule of Reg. § 1.61-21(f), use the commuting valuation rule with respect to the vehicle.

Background—the fleet-average valuation rule. For employer-provided automobiles available to employees for personal use for an entire year, generally the value of the personal use may be determined under the automobile lease valuation rule of Reg. § 1.61-21(d). Under this valuation rule, the value of the personal use is the Annual Lease Value. Provided the requirements of Reg. § 1.61-21(d)(5)(v) are met, an employer with a fleet of 20 or more automobiles may use a fleet-average value for purposes of calculating the Annual Lease Values of the automobiles in the employer’s fleet. However, Reg. § 1.61-21(d)(5)(v)(D) provides that the value of an employee’s personal use of an automobile may not be determined under the fleet-average valuation rule for a calendar year if the fair market value of the automobile on the first date the automobile is made available to an employee exceeds the base value of $16,500, as adjusted annually for inflation pursuant to Code Sec. 280F(d)(7).

Background—Tax Cuts and Jobs Act change. The Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017) significantly increased the maximum dollar limitations on the depreciation deductions for passenger automobiles under Code Sec. 280F(a) and also changed the way that inflation increases are calculated.

Background—Notice 2019-8. Notice 2019-8, 2019-3 IRB, states that, consistent with the substantial increase in the dollar limitations on depreciation deductions under Code Sec. 280F(a), as modified by the TCJA, IRS intends to amend Reg. §1.61-21(d) and Reg §1.61-21(e) to incorporate a higher base value of $50,000 as the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules effective for the 2018 calendar year. Notice 2019-8 also provides that, for 2018, the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules is $50,000.

Background—Notice 2019-34.  Notice 2019-34, 2019-22 IRB, provides various rules, including: a) rules that provide relief to taxpayers with respect to the abovementioned regs that were not updated to reflect the TCJA’s increase in the limitations on permitted depreciation for automobiles; and b) the method of publishing maximum vehicle value in the future.

Proposed regs formalize and explain earlier Notices.  The proposed regs update the fleet-average and vehicle cents-per-mile valuation rules described in Reg §1.61-21(d) and Reg §1.61-21(e), respectively, to align the limitations on the maximum vehicle fair market values for use of these special valuation rules with the changes made by the TCJA to the depreciation limitations in Code Sec. 280F. Specifically, consistent with the substantial increase in the dollar limitations on depreciation deductions under Code Sec. 280F(a), the proposed regs increase, effective for the 2018 calendar year, the maximum base fair market value of a vehicle for use of the fleet-average or vehicle cents-per-mile valuation rule to $50,000. (Preamble to Prop Reg REG-101378-19)

As previously, the maximum fair market value of a vehicle for purposes of the fleet-average and vehicle cents-per-mile valuation rule is adjusted annually under Code Sec. 280F(d)(7). This annual adjustment will be calculated in accordance with Code Sec. 280F(d)(7) as amended by the TCJA. Consistent with Notice 2019-34, IRS expects that the inflation-adjusted maximum fair market value for a vehicle for purposes of the fleet-average and vehicle cents-per-mile valuation rules will be included in the annual notice published by IRS providing the standard mileage rates for the use of an automobile for business, charitable, medical, and moving expense purposes and the maximum standard automobile cost for purposes of an allowance under a fixed and variable rate plan. (Prop Reg §1.61-21(d)(5)(v)(D); Prop Reg §1.61-21(e)(1)(iii)(A))

The proposed regs provide the following rules that are consistent with rules contained in Notice 2019-34.

With respect to the vehicle cents-per-mile valuation rule, the regs provide the following rule for a vehicle first made available to any employee of the employer for personal use before calendar year 2018. If an employer did not qualify under Reg §1.61-21(e)(5) to adopt the vehicle cents-per-mile valuation rule on the first day on which the vehicle was used by the employee for personal use because the fair market value of the vehicle exceeded the inflation-adjusted limitation of Reg §1.61-21(e)(1)(iii), as published by IRS in a notice or revenue procedure applicable to the year the vehicle was first used by the employee for personal use, the employer may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 taxable year with respect to the vehicle, provided the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019, respectively. (Prop Reg §1.61-21(e)(5)(vi))

The regs provide a similar rule if the commuting valuation rule of Reg §1.61-21(f) was utilized when the vehicle was first used by an employee of the employer for personal use, and the employer did not qualify to switch to the vehicle cents-per-mile valuation rule on the first day on which the commuting valuation rule was not used because the vehicle had a fair market value in excess of the inflation-adjusted limitation of Reg §1.61-21(e)(1)(iii), as published by IRS in a notice or revenue procedure applicable to the year the commuting valuation rule was first not used. In that case, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 taxable year, provided the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019, respectively. However, consistent with Reg §1.61-21(e)(5), an employer that adopts the vehicle cents-per-mile valuation rule must continue to use the rule for all subsequent years in which the vehicle qualifies for use of the rule, except that the employer may, for any year during which use of the vehicle qualifies for the commuting valuation rule of Reg §1.61-21(f), use the commuting valuation rule with respect to the vehicle. (Prop Reg §1.61-21(e)(5)(vi))

With respect to the fleet-average valuation rule, if an employer did not qualify to use the fleet-average valuation rule prior to January 1, 2018 with respect to an automobile because the fair market value of the automobile exceeded the inflation-adjusted maximum value requirement of Reg §1.61-21(d)(5)(v)(D), as published by IRS in a notice or revenue procedure applicable to the year the automobile was first made available to any employee of the employer, the employer may adopt the fleet-average valuation rule for 2018 or 2019, provided the fair market value of the automobile does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019, respectively. (Prop Reg §1.61-21(d)(5)(v)(G))

Reliance.  Until amendments to the final regs are published, taxpayers may rely on the guidance provided in the proposed regs. (Preamble to Prop Reg REG-101378-19)

References: For the cap on FMV of vehicles for which the cents-per-mile method may be used, see FTC 2d/FIN ¶ H-2272United States Tax Reporter ¶ 614.027. For the maximum FMV of autos for which fleet-average valuations may be used, see FTC 2d/FIN ¶ H-2260United States Tax Reporter ¶ 614.027.

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