The IRS recently announced the inflation-adjusted maximum fair market value (FMV) of an employer-provided vehicle under the vehicle cents-per-mile and fleet-average special valuation rules. Employers can use these rules to value an employee’s personal use of such a vehicle for income and employment tax purposes. Importantly, the new values reflect vehicle-related amendments in the Tax Cuts and Jobs Act (TCJA) and the IRS’ intent to make the rules more widely available to employers.
How to Value the Personal Use of an Employer-Provided Vehicle
When an employer provides an employee with a vehicle that’s also available for personal use, the employer must include the FMV of the personal use in the employee’s income. In general, the FMV is the amount the employee would have to pay a third party to lease the same or similar vehicle on the same or comparable terms in the geographic area in which the employee uses the vehicle. Employers can use the following methods to determine FMV:
- Commuting valuation rule. Under this rule, employers determine the value of a vehicle provided to an employee for commuting use by multiplying each one-way commute (that is, from home to work or work to home) by $1.50. If more than one employee commutes in the vehicle, this value applies to each employee. Be aware employers must meet stringent requirements to use this method, including having a written policy that limits the employee’s use to commuting and de minimis personal use (such as making a stop for a personal errand on the way between a business delivery and the employee's home) and requiring the employee to commute in the vehicle for bona fide non compensatory business reasons.
- The cents-per-mile rule. Employers can use the business standard mileage rate (58 cents for 2019, less up to 5.5 cents if the employer does not provide fuel) multiplied by the total miles the employee drives the vehicle (including cars, trucks and vans) for personal purposes.
- The automobile annual lease valuation rule. With this method, employers use the annual lease value of the automobile (including trucks and vans) — as specified by an IRS table that bases annual lease value on an automobile’s FMV — multiplied by the percentage of personal miles out of total miles driven by the employee. The annual lease value does not include the value of fuel provided to an employee for personal use; the value of the fuel must be added separately. In addition, the fleet-average value rule allows employers operating a fleet of 20 or more qualifying automobiles to use an average annual lease value for every qualifying vehicle in the fleet when applying the automobile annual lease valuation rule.
Note the fleet-average value rule or the simple cents-per-mile rule is not available, though, if the FMV of the vehicle exceeds a certain base value, adjusted annually for inflation, on the first date the vehicle is made available to the employee for personal use. In 2017, the maximum value for the cents-per-mile rule was $15,900 for a passenger automobile and $17,800 for a truck or van. The maximum value for the fleet-average value rule in 2017 was $21,100 for a passenger automobile and $23,300 for a truck or van.
Taxpayer-Favorable Changes Made by the TCJA
The 2018 base values were significantly raised earlier this year, in IRS Notice 2019-08, to reflect amendments made by the TCJA, which changed the price inflation measure for automobiles (including trucks and vans). The TCJA also substantially increased the maximum annual dollar limitations on the depreciation deductions for passenger automobiles, basing the latter on the depreciation of a passenger automobile with a cost of $50,000 (up from $12,800), inflation adjusted annually, over a five-year recovery period.
The IRS announced in the guidance that it intended to amend the tax regulations to incorporate a base value of $50,000 for both the cents-per-mile and the fleet-average value rules, effective for the 2018 calendar year. The IRS also intends to amend the regulations to provide that the base value will be adjusted annually for 2019 and future years using the new price inflation measure.
What Is the Value of a Vehicle in 2019?
Most recently, in IRS Notice 2019-34, the IRS announced the adjusted values for 2019. For vehicles and automobiles first made available to employees for personal use in calendar year 2019, the maximum value under both rules is $50,400. Under planned amendments to the applicable regulations, these maximum values will be the same as the maximum standard automobile cost that determines eligibility to set reimbursement allowances under a fixed and variable rate plan — an alternative to the business standard mileage rate.
The IRS also shared its intention to amend the tax regulations to provide relief to employers that previously didn’t qualify for the cents-per-mile rule because, under the earlier rules, the vehicle’s FMV exceeded the permissible maximum value.
Note, though, that employers that adopt the cents-per-mile rule generally must continue to use it for all subsequent years in which the vehicle qualifies. An employer can, however, use the commuting valuation rule for any year the vehicle qualifies.
Similarly, employers that didn’t qualify for the fleet-average value rule before 2019 because of the pre-2018 maximum value limit can adopt the rule for 2018 or 2019 if it falls under the applicable maximum value.
The new notice confirms employers can still use the flexible guidelines in Announcement 85-113 to determine the timing for withholding, paying and reporting employment tax on taxable noncash fringe benefits. That means employers may use the rules in that guidance, the IRC Section 6413 adjustment process, or the refund claim process under Section 6402 to correct any overpayment of federal employment taxes resulting from application of IRS Notice 2019-34.
Additional Requirements for Determining Value of an Employer-Provided Vehicle
Satisfying the maximum value limit isn’t enough for an employer to use the cents-per-mile rule or the fleet-average value rule to value an employee’s personal use of a vehicle. Both rules come with other requirements that can prove difficult to meet. For example, the cents-per-mile rule generally is available only if the employer reasonably expects the vehicle to be regularly used in its trade or business throughout the calendar year or the vehicle meets the mileage test under Treas. Reg. 1.61-21(e)(1)(ii). Talk with your tax advisors to help you determine the best valuation method for your circumstances.
Please contact a member of your service team, or contact Dan Michael at dmichael@cohencpa.com for further discussion.
