IRS Updates Guidance on Vehicle Cents-Per-Mile Valuation Rules

(Parker Tax Publishing January 2019)

The IRS issued the 2018 inflation-adjusted maximum values for use with the vehicle cents-per-mile valuation rule and the fleet-average valuation rule, which is an optional component of the automobile lease valuation rule. The IRS also issued interim guidance on new procedures for calculating the inflation adjustments to the maximum values for use with the special valuation rules under Reg. Sec. 1.61-21(d) and (e) using Code Sec. 280F(d)(7), as modified by the Tax Cuts and Jobs Act of 2017. Notice 2019-8.

Background

Under Code Sec. 61 and Reg. Sec. 1.61-21, if an employer provides an employee with a vehicle that is available to the employee for personal use, the value of the personal use generally must be included in the employee's income.

For employer-provided vehicles made available to employees for personal use that meet the requirements of Reg. Sec. 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. Sec. 1.61-21(e). However, Reg. Sec. 1.61-21(e)(1)(iii)(A) provides that, for a vehicle first made available after 1988, 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 (determined under Reg. Sec. 1.61-21(d)(5)) on the first date the vehicle is made available to the employee exceeds the sum of the maximum recovery deductions allowable under Code Sec. 280F(a) for a five-year period for an automobile first placed in service during that calendar year, as adjusted by Code Sec. 280F(d)(7). The regulation additionally specifies that, with respect to a vehicle placed in service in or after 1989, the limitation on value consists of a base value of $12,800 that is adjusted annually under Code Sec. 280F(d)(7).

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. Sec. 1.61-21(d). Under this rule, the value of the personal use is the Annual Lease Value. Provided the requirements of Reg. Sec. 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. The fleet-average value is the average of the fair market values of all the automobiles in the fleet. However, Reg. Sec. 1.61-21(d)(5)(v)(D) provides that for an automobile first made available after 1988 to an employee for personal use, the value of the personal use may not be determined under the fleet-average valuation rule for a calendar year if the fair market value of the automobile (determined under Reg. Sec. 1.61-21(d)(5)) on the first date the automobile is made available to the employee exceeds the base value of $16,500, as adjusted annually for inflation under Code Sec. 280F(d)(7).

Thus, the maximum values for applying the vehicle cents-per-mile and the fleet-average valuation rules reflect the automobile price inflation adjustment of Code Sec. 280F(d)(7)(B). Prior to enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), the price inflation amount for automobiles other than trucks and vans was calculated using the new car component of the Consumer Price Index (CPI) automobile component. Beginning in 2005, the IRS began to calculate the price inflation adjustment for trucks and vans separately using the new truck component of the CPI and continued using the new car component of the CPI for automobiles other than trucks and vans.

TCJA 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 CPI automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component. The C-CPI-U does not currently have separate components for new cars and new trucks.

For owners of passenger automobiles, Code Sec. 280F(a), as modified by the TCJA, imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. 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).

Notice 2019-8

In late December, the IRS issued Notice 2019-8, which provides that, consistent with the substantial increase in the dollar limitations on depreciation deductions under Code Sec. 280F(a), the IRS intends to amend Reg. Sec. 1.61-21(d) and (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. Further, the IRS intends that the regulations will be modified to provide that this $50,000 base value will be adjusted annually using Code Sec. 280F(d)(7) for 2019 and subsequent years. Consistent with this intention, in the interim:

(1) The maximum value of an employer-provided vehicle first made available to employees for personal use in calendar year 2018 for which the vehicle cents-per-mile valuation rule provided under Reg. Sec. 1.61-21(e) may be applicable is $50,000.

(2) The maximum value of an employer-provided automobile first made available to employees for personal use in calendar year 2018 for which the fleet-average valuation rule provided under Reg. Sec. 1.61-21(d) may be applicable is $50,000.

For 2018 and 2019, due to the lack of data, the IRS said it will not publish separate maximum values for trucks and vans for use with the vehicle cents-per-mile and fleet-average valuation rules.

Employment Tax Aspects of Taxable Noncash Fringe Benefits

Employer-provided vehicles are noncash fringe benefits that fall within Code Sec. 3501(b). Announcement 85-113 provides guidelines for withholding, paying, and reporting employment tax on taxable noncash fringe benefits and provides generally that taxpayers may rely on the guidelines in the Announcement until the issuance of regulations that supersede the temporary and proposed regulations under Code Sec. 3501(b). No regulations have been issued under Code Sec. 3501(b) that supersede the Announcement. Thus, Announcement 85-113 generally applies to current payments of noncash fringe benefits, including vehicles.

Announcement 85-113 allows payors of certain noncash fringe benefits to treat the benefits as paid on any day(s) during the year so long as they treat benefits provided in a calendar year as paid not later than December 31 of the calendar year. The Announcement also allows employers to treat certain benefits paid during the last two months of the year (or any shorter period) as paid during the subsequent calendar year.

Employers that wish to use the vehicle cents-per-mile rule or the fleet-average value rule for 2018 based on the maximum values set forth in Notice 2018-9 may use the rules in Announcement 85-113 or the adjustment process under Code Sec. 6413, or the refund claim process under Code Sec. 6402 to correct any overpayment of federal employment taxes on these amounts.

For a discussion of the vehicle cents-per-mile 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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