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Proposed Regs Increase Maximum Value for Personal Use of Employer-Provided Vehicles
(Parker Tax Publishing September 2019)
The IRS issued proposed regulations, which reflect changes made by the Tax Cuts and Jobs Act of 2017, on the special valuation rules for employers and employees to use in determining the amount includible in an employee's gross income for personal use of an employer-provided vehicle. The proposed regulations increase to $50,000, effective for the 2018 calendar year, the maximum base fair market value of a vehicle for use in the fleet-average valuation rule in Reg. Sec. 1.61-21(d) or the vehicle cents-per-mile valuation rule in Reg. Sec. 1.61-21(e) and provide transition rules for 2018 and 2019. REG-101378-19.
Background
If an employer provides an employee with a vehicle 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 federal income tax withholding purposes.
The amount that must be included in the employee's income and wages for the personal use of an employer-provided vehicle generally is determined using the vehicle's fair market value (FMV). However, the regulations under Code Sec. 61 provide special valuation rules for employer-provided vehicles, including the fleet-average valuation rule in Reg. Sec. 1.61-21(d)(5)(v) and the vehicle cents-per-mile valuation rule in Reg. Sec. 1.61-21(e). These two special valuation rules are subject to limitations, including that they may be used only for vehicles having values not in excess of a maximum amount set forth in the regulations. Under the current regulations, Reg. Sec. 1.61-21(e)(1)(iii) permits the vehicle cents-per-mile valuation rule to be used only if the vehicle's FMV is no greater than $12,800, and Reg. Sec. 1.61-21(d)(5)(v)(D) permits the fleet-average valuation rule to be used only to value the personal use of vehicles having FMVs no greater than $16,500, as adjusted annually under Code Sec. 280F(d)(7).
Reg. Sec. 1.61-21(e)(5)(i) states that an employer must adopt the vehicle cents-per-mile rule for a vehicle to take effect by the first day on which the vehicle is used by an employee for personal use (or, if the commuting valuation rule of Reg. Sec. 1.61-21(f) is used when the vehicle is first used by an employee for personal use, the first day on which the commuting valuation rule is not used). Reg. Sec. 1.61-21(e)(5)(ii) also provides that once the vehicle cents-per-mile valuation rule has been adopted for a vehicle, the employer must use that rule for all subsequent years in which the vehicle qualifies, except that the employer may, for any year during which use of the vehicle qualifies for the commuting valuation rule, use that rule with respect to the vehicle.
The Tax Cuts and Jobs Act (TCJA) substantially increased the maximum annual dollar limitations on the depreciation deductions for passenger automobiles. The new dollar limitations are based on the depreciation, over a five-year recovery period, of a passenger automobile with a cost of $50,000 (formerly $12,800). The TCJA also amended Code Sec. 280F(d)(7)(B), effective for tax years beginning after December 31, 2017, to provide that the price inflation amount for automobiles (including trucks and vans) is calculated using both the Consumer Price Index (CPI) automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component.
Notice 2019-8 provided interim guidance for 2018 for calculating the inflation adjustments to the maximum vehicle values using Code Sec. 280F(d)(7). Under Notice 2019-8, the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules for 2018 was $50,000. The IRS stated that it intended to amend Reg. Sec. 1.61-21(d) and Reg. Sec. 1.61-21(e) to incorporate a higher base value of $50,000 as the maximum value for the 2018 calendar year and that the $50,000 base value will be adjusted annually using Code Sec. 280F(d)(7) for 2019 and subsequent years. The IRS also indicated in Notice 2019-8 that, due to a lack of data, it will not publish separate maximum values for trucks and vans. In Notice 2019-34, the IRS provided that the inflation-adjusted maximum vehicle value for employer-provided vehicles (including cars, vans and trucks) in calendar year 2019 is $50,400. Notice 2019-34 also provides information about the manner in which the IRS will publish the maximum vehicle value in the future. In addition, Notice 2019-34 provided transition rules for 2018 and 2019 for any employer that did not qualify to use the fleet-average or vehicle cents-per-mile valuation rules before 2018.
Proposed Regulations
In late August, the IRS issued proposed regulations in REG-101378-19 that update the fleet-average and vehicle cents-per-mile valuation rules to align the maximum FMV for use with 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 regulations increase, effective for the 2018 calendar year, the maximum base FMV of a vehicle for use in the fleet-average or vehicle cents-per-mile valuation rule to $50,000, as adjusted annually under Code Sec. 280F(d)(7). The IRS expects that the inflation-adjusted maximum FMV will be included in the annual notice 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 (FAVR) plan.
The proposed regulations also include the following transition rules:
(1) If an employer did not qualify to use the fleet-average valuation rule before January 1, 2018, with respect to an automobile because its FMV exceeded the inflation-adjusted maximum value for the year the automobile was first made available to an employee, the employer may adopt the fleet-average valuation rule for 2018 or 2019, provided the vehicle's FMV does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019, respectively.
(2) With respect to the vehicle cents-per-mile valuation 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. Sec.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, the employer may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax 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. Similarly, if the commuting valuation rule in Reg. Sec. 1.61-21(f) was used when the vehicle was first used by an employee for personal use, and the employer did not qualify to switch to the vehicle cents-per-mile valuation rule because the vehicle's FMV exceeded the inflation-adjusted limit in Reg. Sec. 1.61-21(e)(1)(iii), the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year, provided the vehicle's FMV does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019, respectively. However, consistent with Reg. Sec. 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, except that the employer may, for any year during which use of the vehicle qualifies for the commuting valuation rule, use that rule with respect to the vehicle.
Taxpayers are permitted to rely on the proposed regulations until final regulations are issued.
For a discussion of special fringe benefit valuation rules, see Parker Tax ¶123,115.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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