On January 4, 2021, the Internal Revenue Service released Notice 2021-7, granting relief to certain employers and employees using the “automobile lease valuation rule” to determine the value of an employee’s personal use of an employer-provided automobile. The Notice essentially allows for the elective use of the more employee-friendly “cents-per-mile” method in determining the amount of income that is required to be reported by the employee for the personal use of an employer-provided vehicle as of March 13, 2020. For 2021, employers and employees may revert to the automobile lease valuation rule or continue using the vehicle cents-per-mile valuation rule provided certain requirements are met.
This relief is provided to alleviate some of the negative impact created by COVID-19, and the resulting change in business operations. The Release notes, “As a result of the pandemic, many employers suspended business operations or implemented telework arrangements for employees. Consequently, employers have indicated 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), employers have noted a resulting increase in the lease value required to be included in an employee’s income for 2020 as compared to prior years.”
The key problem in measuring personal use of an employer-provided vehicle is that the overall value of the use of the vehicle is a fixed amount under the lease valuation rule. As such, the amount the employee pays tax on is based on the ratio of personal use to overall use of the vehicle, as opposed to the “actual” amount of personal use. If employees are not using the vehicle as much for work-related purposes, the percentage of personal use will increase (even if the actual hours of personal use do not).
The Notice points out the benefits of using the cents-per-mile method: “…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.” The regulations include various restrictions on the ability to use the cents-per-mile rule.
Generally, taxpayers are not permitted to switch between methods from year-to-year. However, with this Notice, the Internal Revenue Service has waived the consistency requirement, allowing both methods to be used in 2020 as well as changes for 2021. It is important to note that the relief granted is not for the entirety of 2020. The cents-per-mile rule (at a rate of 57.5 cents/mile) can only be used beginning on March 13, 2020 (the date the pandemic emergency was declared).
Calculations and Requirements
The Notice provides instructions for using both methods during the 2020 calendar year: “…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.” The Notice also includes instructions for employers to implement this change in method for 2020.
If the employer chooses to switch to the cents-per-mile rule, that decision is binding on the employee. Additionally, the fair market value of the vehicle limit still remains in place. As such, employees provided with a vehicle with fair market value in excess of $50,400 will still need to have their personal use valued under the standard lease valuation method.
The Notice allows employers who switch to the cents-per-mile method for 2020 to revert to the automobile lease valuation rule for 2021 or to continue to use the cents-per-mile method (at a rate of 56 cents/mile). A critical item in the Notice is the mandate that if an employer wishes to return to the lease valuation rule, the employer must do so for 2021, or the continued use of the cents-per-mile rule will be required. Employees that use one of the special valuation rules for vehicles must use the same special valuation rule for vehicles that is used by their employer.
Computing the taxable value of the personal use of listed property for employees, especially vehicles, can be extremely burdensome for employers. The computations are critical in that any value determined to be includible in employee compensation for noncash fringe benefits are subject to federal income tax, as well as all employment taxes. For affected taxpayers, the timing of the release is troublesome as Forms W-2, Wage and Tax Statements, are due at the end of January.