The IRS published Notice 2021-7 (the Notice) providing temporary relief for employees and employers using the automobile lease valuation rule to determine the value of an employee’s personal use of an employer-provided automobile includible in taxable income.
In a typical year a company using the automobile lease valuation method would calculate an amount to be included in gross income by determining the annual lease value of the automobile and then adjusting it by the percentage of business and personal miles driven by the employee. Furthermore, generally once the employer and employee have chosen a valuation methodology for an employer-provided vehicle, they must apply it consistently and not switch to another method later.
Due to business interruptions caused by the COVID-19 pandemic in 2020, there was significantly less business travel during 2020. Thus, the business usage is likely a much smaller percentage than in a typical year, which would require a larger amount to be included in an employee’s income for 2020 from the annual lease value. In recognition of this likely inaccurate result, the Notice provides that companies may ignore the consistency rules and instead switch to the vehicle cents-per-mile valuation beginning March 13, 2020, as long as certain requirements are satisfied.
To qualify for this temporary relief, the employer must have reasonably expected that an automobile with a fair market value not exceeding $50,400 would have been regularly used in the employer’s trade or business throughout the year, but that due to the COVID-19 pandemic, the automobile was not regularly used in the employer’s trade or business. Any qualified employer that chooses to switch to the vehicle cents-per-mile valuation rule for the 2020 calendar year must prorate the value of the vehicle using the automobile lease valuation rule for Jan. 1, 2020, through March 12, 2020. Then, as of March 13, 2020, employers may begin using the vehicle-cents-per-mile valuation rule.
Looking forward to the rest of 2021, employers and employees may revert to the automobile lease valuation rule or continue to use the vehicle cents-per-mile valuation. The consistency rules will apply as if the vehicle was first placed in service on Jan. 1, 2021. Employers with employer-provided vehicles should carefully review this guidance and consider any implications for 2020 taxable noncash fringe benefits according to guidance referenced in the Notice.