Final Regs Increase Maximum Value for Personal Use of Employer-Provided Vehicles

(Parker Tax Publishing February 2020)

The IRS issued final 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. Consistent with the proposed regulations, the final 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. T.D. 9893.

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, one being that they may be used only for vehicles having values not in excess of a maximum amount set forth in the regulations. Under the prior regulations, the vehicle cents-per-mile valuation rule was to be used only if the vehicle's FMV was no greater than $12,800, and the fleet-average valuation rule was only permitted to be used to value the personal use of vehicles having FMVs no greater than $16,500, as adjusted annually under Code Sec. 280F(d)(7).

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. 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 was $50,400. 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. In August 2019, the IRS issued proposed regulations in REG-101378-19 to reflect the TCJA changes to the depreciation limitations in Code Sec. 280F and the guidance provided in Notice 2019-8 and Notice 2019-34.

Final Regulations

In T.D. 9893, the IRS adopted the proposed regulations in REG-101378-19 as final regulations without substantive changes. The final regulations update the fleet-average and vehicle cents-per-mile valuation rules described in Reg. Sec. 1.61-21(d) and Reg. Sec. 1.61-21(e), respectively, to align the limitations on the maximum vehicle FMVs for use of these special valuation rules with the changes made by the TCJA to the depreciation limitations in Code Sec. 280F. Specifically, the final regulations increase, effective for the 2018 calendar year, the maximum base FMV of a vehicle for use of the fleet-average or vehicle cents-per-mile valuation rule to $50,000.

Consistent with the prior final regulations, the maximum FMV of a vehicle for purposes of the fleet-average and vehicle cents-per-mile valuation rules 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. The inflation-adjusted maximum FMV 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 the 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 FAVR plan.

Furthermore, consistent with Notice 2019-34 and the proposed regulations, the following transition rules are included in the final regulations:

(1) 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 FMV of the automobile exceeded the inflation-adjusted maximum value requirement of Reg. Sec. 1.61-21(d)(5)(v)(D), as published by the 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 FMV of the automobile 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 for 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 FMV 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 of 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.

The final regulations apply to tax years beginning on or after February 5, 2020. However, taxpayers may choose to apply the transition rules beginning on or after January 1, 2018.

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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