On January 4, 2021, the Internal Revenue Service issued Notice 2021-7 pertaining to the valuation of the personal use of employer-provided vehicles.  The Notice permits employers who rely on the special valuation rule of Treasury Regulation § 1.61-21(d), known as the Automobile Lease Valuation (ALV) method, to retroactively apply the vehicle cents-per-mile method of Treasury Regulation § 1.61-21(e) for purposes of valuing an employee’s personal use of a company vehicle in 2020.  Due to decreased business use of employer-provided vehicles during the COVID-19 pandemic, the IRS agreed with employers that the application of the ALV method may have resulted in higher income imputation than usual for many employees and that the use of the vehicle cents-per-mile method may provide a “more accurate reflection of the employee’s income . . [,]” particularly in 2020.  The ability to switch from the ALV method to the vehicle cents-per-mile method for 2020 applies only to a vehicle with a fair market value not exceeding $50,400 in 2020 and with respect to which the employer would reasonably have expected its regular use in the employer’s trade or business, were it not for the pandemic.

In addition, Notice 2021-7 provides employers, who switch from the ALV method to the vehicle cents-per-mile method for purposes of calculating personal use of the vehicle in 2020, with the option of continuing to apply the vehicle cents-per-mile method in 2021.  If the employer decides to continue using the vehicle cents-per-mile method in 2021, that method must be used by the employer and employee for all subsequent years, except to the extent the commuting valuation rule applies.  This decision will require employers to carefully evaluate whether the vehicle will continue to meet all of the requirements of Treasury Regulation § 1.61-21(e), other than the consistency requirement, and whether the value of the employee’s personal use of the vehicle will actually be calculated more favorably under the vehicle cents-per-mile method as compared to the ALV method, once the pandemic recedes in 2021 and vehicle use increases.
Continue Reading Notice 2021-7 Provides Employers Relief and Potential Opportunities on Valuation of Employer-Provided Vehicles in Light of COVID-19 Pandemic

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.
Continue Reading New Treasury Regulations Ease Payroll Administration Related to Employer-Provided Vehicles