If an employer provides an employee a vehicle for personal use, generally the value of the personal use must be included as employee income. In most cases, an employer uses the general valuation rule to determine the fair market value of an employee benefit. However, the IRS provides special valuation rules, the fleet average and the vehicle cents-per-mile valuation rules, to value an employee’s personal use of an employer-provided vehicle for income and employment tax purposes.
Prompted by the amendments made to the depreciation limitations by the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS recently issued proposed regulations to update the limitations placed on the special valuation rules. The proposed regulations increase the maximum base fair market value of a vehicle for use of the special valuation rules to $50,000, effective for the 2018 calendar year. This change is consistent with the substantial increase in the dollar limitations on depreciation deductions made by TCJA, making the special valuation rules more widely available to employers who provide vehicles to employees for personal use.
Prior to this proposed regulation, the IRS issued Notice 2019-08 and Notice 2019-34 to provide interim guidance for calculating the price inflation adjustments to the maximum vehicle values for use with the special valuation rules.
The IRS issued these notices with the expectation that regulations would be proposed to provide further guidance, and the regulations would be consistent with the rules set forth in the notices. The notices provided taxpayers with the inflation-adjusted maximum fair market value. The expectation held true, as the proposed regulation provides a maximum fair market value of a vehicle for the special valuation rules as adjusted annually under section 280F(d)(7) of the Internal Revenue Code.
Consistent with Notice 2019-34 the proposed regulation provides a transition rule for taxpayers who did not previously qualify for the fleet average and the vehicle cents-per-mile valuation rules because their vehicle exceeded the maximum value.
- With respect to the fleet average valuation rule, the transition rule allows the for employers who did not qualify for this rule prior to Jan. 1, 2018 because the fair market value of the automobile exceeded the inflation-adjusted maximum value to adopt the fleet average valuation rule for 2018 or 2019. This is permissible provided that the fair market value of the automobile does not exceed $50,000 on Jan. 1, 2018 or $50,400 on Jan. 1, 2019, respectively.
- The vehicle cents-per-mile valuation rule with respect to the transition rule operates in a similar manner. If the employer did not qualify because the fair market value exceeded the inflation-adjusted limitation, then the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year with respect to the vehicle provided that the fair market value does not exceed $50,000 on Jan. 1, 2018 or $50,400 on Jan. 1, 2019, respectively.
- However, if an employer adopts the vehicle cents-per-mile valuation rule, then the employer must continue to use the rule for all subsequent years in which the vehicle qualifies under the rule. Except that the employer may, for any year during which use of the vehicle qualifies for the commuting valuation rule, use the commuting valuation rule for that vehicle.
An employer may use the commuting rule if the sole personal use of an employer-provided vehicle is commuting back and forth from work. The value of each one-way commute is $1.50. The commuting value rule is only applicable if the employer provides the vehicle to an employee (who is not a control employee) for use in the employer’s trade or business. Further, the employer must have a written policy that does not allow the employee to use the vehicle for personal purposes, other than for commuting or de minimus personal use; and, the employee actually does not use the vehicle for other personal purposes.