IRS Grants Temporary Relief for Employers Using Automobile Lease Valuation Rule

(Parker Tax Publishing January 2021)

In response to the ongoing COVID-19 pandemic, the IRS is providing temporary relief to employers and employees using the automobile lease valuation rule to determine the value of an employee's personal use of an employer-provided automobile for purposes of income inclusion, employment tax, and reporting. Due solely to the COVID-19 pandemic, if certain requirements are satisfied, employers and employees that are using the automobile lease valuation rule may instead use the vehicle cents-per-mile valuation rule to determine the value of an employee's personal use of an employer-provided automobile beginning as of March 13, 2020, and, for 2021, employers and employees may revert to the automobile lease valuation rule or continue using the vehicle cents-per-mile valuation rule providing certain requirements are met. Notice 2021-7.

Background

If an employer provides an employee with an automobile that is available to the employee for personal use, the value of the personal use must be included in the employee's gross income. Reg. Sec. 1.61-21(b)(1) states that an employee must include in gross income the amount by which the fair market value of a fringe benefit exceeds the sum of: (1) the amount, if any, paid for the benefit by or on behalf of the recipient; and (2) the amount, if any, specifically excluded from gross income.

The value of an employee's personal use of an employer-provided automobile may be determined under the automobile lease valuation rule, the vehicle cents-per-mile rule, or the commuting valuation rule. Under the automobile lease valuation rule, the employer determines the fair market value of the automobile when it is first made available to any employee and applies the corresponding annual lease value from the table provided in Reg. Sec. 1.61-21(d)(2)(iii). Under the vehicle cents-per-mile valuation rule, the value of the benefit provided in the calendar year equals the standard mileage rate multiplied by the total number of miles the vehicle is driven by the employee for personal purposes. Under the commuting valuation rule, the value of a vehicle provided to an employee for commuting use is determined by multiplying the number of one-way commutes by $1.50. Use of the commuting valuation rule is subject to stringent requirements, such as having a written policy limiting the employee's use to commuting and de minimis personal use. The consistency rules set forth in Reg. Sec. 1.61-21(d)(7) and Reg. Sec. 1.61-21(e)(5) provide that the employer and the employee must use the chosen valuation methodology consistently, except that the employer and the employee may use the commuting valuation rule if the requirements for it are satisfied.

Under Code Sec. 132(a)(3), gross income does not include any fringe benefit that qualifies as a working condition fringe. A working condition fringe means any benefit provided to an employee of the employer to the extent that, if the employee paid for the benefit, the payment would be allowable as a deduction under Code Sec. 162 or Code Sec. 167. Employers that provide vehicles for their employees' use can exclude as a working condition fringe the amount that would be allowable as a deductible business expense if the employee paid for its use. If the employee uses the vehicle for both business and personal use, the value of the working condition fringe is the part determined to be for business use of the vehicle. Amounts that are excluded from gross income under Code Sec. 132 are also excluded from Federal Insurance Contributions Act (FICA) taxes, Federal Unemployment Tax Act (FUTA) tax, and federal income tax withholding. Employer-provided automobiles are noncash fringe benefits. Announcement 85-113 provides guidelines for withholding, paying, and reporting employment tax on taxable noncash fringe benefits. Section 1 of 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. Section 5 of the announcement 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.

On March 13, 2020, President Trump issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing COVID-19 pandemic. As a result of the pandemic, many employers suspended business operations or implemented telework arrangements for employees, and consequently, employers have indicated to the IRS that business and personal use of employer-provided automobiles has been reduced for employees. However, due to the way in which the value of an employee's personal use of an employer-provided automobile is computed using the automobile lease valuation rule under Reg. Sec. 1.61-21(d), there is a resulting increase in the lease value required to be included in an employee's income for 2020 compared to prior years. In contrast, determining the value of an employee's personal use of an employer-provided automobile using the vehicle cents-per-mile valuation rule results in income inclusion of only the value that relates to actual personal use, thereby providing a more accurate reflection of the employee's income in these circumstances.

Notice 2021-7

Due to the suddenness and unexpected onset of the COVID-19 pandemic, the IRS is providing relief from the consistency rules in Reg. Sec. 1.61-21(d)(7) and Reg. Sec. 1.61-21(e)(5). Accordingly, under Notice 2021-7, an employer using the automobile lease valuation rule for the 2020 calendar year may instead use the vehicle cents-per-mile valuation rule beginning on March 13, 2020, notwithstanding the consistency rules in Reg. Sec. 1.61-21(d)(7), if, at the beginning of the 2020 calendar year, the employer reasonably expected that an automobile with a fair market value not exceeding $50,400 would be regularly used in the employer's trade or business throughout the year but, due to the COVID-19 pandemic, the automobile was not regularly used in the employer's trade or business throughout the year.

For this purpose, the COVID-19 pandemic is considered to have begun on March 13, 2020, the date of the President's emergency declaration. Therefore, employers that choose to switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule in the 2020 calendar year must prorate the value of the vehicle using the automobile lease valuation rule for January 1, 2020, through March 12, 2020. Employers should multiply the applicable annual lease value by a fraction, the numerator of which is the number of days during the period beginning on January 1, 2020, and ending on March 12, 2020 (72 days), and the denominator of which is 365. As of March 13, 2020, employers may begin using the vehicle-cents-per-mile valuation rule. Employees using the automobile lease valuation rule whose employers switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule under Notice 2021-7 must also switch to the vehicle cents-per-mile valuation rule.

Further, notwithstanding the consistency rules in Reg. Sec. 1.61-21(e)(5), employers that choose to switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule during 2020 may revert to the automobile lease valuation rule for 2021, provided they meet the requirements of Reg. Sec. 1.61-21(d), other than the consistency rules in Reg. Sec. 1.61-21(d)(7). Alternatively, employers that choose to switch to the vehicle cents-per-mile valuation rule during 2020 may continue using that rule for 2021, provided they meet the requirements of Reg. Sec. 1.61-21(e), other than the consistency rules in Reg. Sec. 1.61-21(e)(5). Employees that use one of the special valuation rules for vehicles must use the same special valuation rule for vehicles that are used by their employer. The consistency rules in Reg. Sec. 1.61-21(e)(5) will apply as of January 1, 2021, as if January 1, 2021, were the first day the vehicle was used by the employee for personal use, and the consistency rules in Reg. Sec. 1.61-21(d)(7) will apply as of January 1, 2021, as if January 1, 2021, were the first day the vehicle was made available to the employee for personal use. Accordingly, the special valuation rule used for 2021 must continue to be used by the employer and the employee for all subsequent years, except to the extent the employer uses the commuting valuation rule.

Employers that originally used the automobile lease valuation rule to calculate the value of the personal use of an employer-provided automobile during 2020 and that want to instead begin using the vehicle cents-per-mile valuation rule during 2020 based on the relief provided in Notice 2021-7 may use the rules in Announcement 85-113 for reporting and withholding on taxable noncash fringe benefits, 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 benefits.

For a discussion of the fringe benefit valuation rules for employer-provided automobiles, see Parker Tax ¶123,115. For a discussion of the rules for refunds or credits of employment taxes and withholding taxes, see Parker Tax ¶261,150.

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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