For decades, employers and employees have been effectively precluded from using two of the handiest special valuation rules—the fleet-average and vehicle cents-per-mile valuation rules—to value employees’ personal use of employer-provided vehicles. The 1989 fringe benefit regulations imposed modest maximum vehicle values ($16,500 and $12,800, respectively, as adjusted for inflation) to limit the use of the rules, which have not kept pace with rising vehicle costs.
When the 2017 Tax Cuts and Jobs Act (“TCJA”) increased the dollar limitations on the depreciation deductions for luxury automobiles under section 280F(a), the permitted maximum value of a vehicle, when using either special valuation rule, increased to $50,000, which is adjusted for inflation beginning with calendar year 2019. On February 5, 2020, Treasury published final regulations amending Treasury Regulation § 1.61-21 to align the increased limitations on the maximum vehicle fair market values with the TCJA changes. Consistent with earlier guidance in proposed regulations, Notice 2019-08, and Notice 2019-34, the final regulations also provide transition rules for employers who desire to retroactively use either special value rule for 2018 or 2019, if the vehicle would have met the increased maximum value requirement in the year the vehicle was first made available to any employee of the employer.
In 1984, the Deficit Reduction Act overhauled the taxation of fringe benefits by adding exclusions under section 132 for certain commonly provided fringe benefits and by amending section 61(a)(1) to include explicitly the value of fringe benefits in income by providing that “gross income means all income from whatever source derived, including . . . [c]ompensation for services, including . . . fringe benefits.” In other words, a fringe benefit provided by an employer to an employee, such as the personal use of a company car, is presumed to be income unless specifically excluded by another section of the Code. If the value of the fringe benefit is includible in income, it must be treated as additional wages paid by the employer and subjected to payroll taxation. The final fringe benefits regulations issued in 1989 discussed fair market valuation under section 61 and included optional special valuation rules for certain fringe benefits, such as employer-provided vehicles. When properly applied, employers and employee may rely on these special valuation rules—such as the fleet-valuation rule and the vehicle cents-per-mile rule—for purposes of income inclusion, withholding and reporting in lieu of determining the actual fair market value of the personal use of the vehicle.
The fleet-average valuation rule is an optional rule within the special valuation rule of Treasury Regulation § 1.61-21(d), known as the automobile lease valuation rule. The automobile lease valuation rule is the most frequently used special valuation rule for valuing an employee’s personal use of an employer-provided automobile. Under the rule, the fair market value of each car must be determined and plugged into the regulation’s annual lease value (“ALV”) chart and the portion of the ALV attributable to personal miles is treated as income to the employee. In cases where an employer has a fleet of 20 or more cars, the regulations permit the employer to use a fleet-average value for purposes of calculating the ALV of any automobile in the fleet, provided the fair market value of the automobile does not exceed a maximum value as permitted under the regulations. The prior final regulations capped the maximum value at $16,500, adjusted annually for inflation). The maximum value was so low—for example, $21,100 for an automobile in 2017—that most employers were precluded from using the fleet-average valuation rule when relying on the automobile lease valuation rule.
Similarly, employers have been precluded from using the vehicle cents-per-mile rule because the limitation on value—$12,800, adjusted for inflation—was even lower than the maximum limitation in the fleet-average valuation rule. Specifically, as an alternative to using the automobile lease valuation method, the regulations permit the valuation of personal miles on any vehicle (not limited to four-wheeled vehicles) at the standard mileage rate used for deduction purposes, provided the vehicle is not a “luxury car” subject to the section 280F limits and either is “used regularly in the employer’s business” or is driven by employees at least 10,000 miles per calendar year (including business and personal miles, but not including miles driven by employees’ families or guests). The mileage does not need to be accrued ratably over the course of the year. The regulations define “used regularly in employer’s business” to mean used at least 50 percent of the time in the employer’s business or used as a commuting vehicle for at least three employees per vehicle every day. Unlike the automobile lease valuation method, cents-per-mile valuation may be used only for personal miles. If the employer does not request a breakdown between business and personal miles, it cannot include in the employee’s gross income for the year the total miles driven by the car times the applicable cents-per-mile rate for the year. If the vehicle cents-per-mile method is available for use by the employer and employee, it will usually result in lower income than the ALV for employees using vehicles with relatively low total (i.e., business plus personal) annual mileage. Helpfully, because the vehicle cents-per-mile rate includes insurance, maintenance and employer-provided gasoline for miles driven in North America, the cents-per-mile rate included in the employee’s income is generally reduced by 5.5 cents per mile under the regulations if the employee purchases the fuel.
The IRS will publish only one maximum value of a vehicle each year, i.e., cars, vans and trucks will not have separate values. The annual adjustments to the maximum fair market value will be published in the notice setting forth 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 a mileage allowance under a fixed and variable rate plan.
The increased maximums for these two special valuation rules should be welcome news to employers and employees, as it can ease administration. It remains to be seen, however, whether employers will take advantage of the transition rules that permit them to determine the value of the personal use of employer-provided vehicles under the fleet-average rule or vehicle cents-per-rule for 2018 and 2019 if the vehicle would have met the new applicable limitations when first put into service. If the employer decides to revise the values that should have been included in the employees’ wages under either the fleet-average or vehicle cents-per-mile valuation rules, it will be necessary to file amended Forms 941 and to issue and file Forms W-2c. For the employees to take advantage of any reduced income, it will likely be necessary for them to file an amended personal tax return. In other words, a fair amount of administrative hassle will be necessary to correct the prior year’s reporting and payroll tax treatment of wages.