The IRS has issued proposed regulations that formalize earlier Notices 2019-08 and 2019-34. These earlier notices introduce rules for valuing employees’ personal use of company vehicles for income- and employment-tax purposes. The proposed regulations impact the inflation-adjusted maximum value of employer-provided vehicles, which falls under the vehicle cents-per-mile and fleet-average value rules.
The new values reflect vehicle-related amendments in the 2017 tax reform reconciliation act, referred to as the Tax Cuts and Jobs Act (TCJA), and the IRS’s intent to make the rules more widely available to employers. The IRS is also temporarily loosening some consistency requirements for 2018 and 2019.
Definitions
The proposed regulations reference requirements related to both automobiles and vehicles. Here’s a definition of each term in accordance with this rule.
Automobile
An automobile is any four-wheeled vehicle, such as a car, pickup truck, or van, manufactured primarily for use on public streets, roads, and highways.
Vehicle
A vehicle is any motorized wheeled vehicle—including an automobile—manufactured primarily for use on public streets, roads, and highways.
Valuation Methods for Personal Use
When an employer provides an employee with a vehicle that’s available for personal use, the value of the personal use must be included in the employee’s income. Employers can generally use the following methods when valuing an employee’s personal use of a company car.
General Valuation Rule
This rule involves evaluating the vehicle’s fair market value (FMV), which is defined as the amount the employee would pay a third party to lease the same or similar vehicle on the same or comparable terms in the geographic area where the employee uses the vehicle.
Commuting Valuation Rule
The commuting valuation rule includes measuring an employee’s total commute distance, to and from work, and multiplying it by $1.50. Qualifying for this method is subject to stringent requirements, such as having a written policy limiting the employee’s use to commuting and de minimis personal use.
Cents-Per-Mile Rule
Employers can use the business-standard mileage rate—which is $0.58 for 2019, less up to $0.055 if the employer doesn’t provide fuel—multiplied by the total number of miles the employee drives the car, truck, or van for personal purposes. 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.
Automobile Annual Lease Valuation Rule
With this method, employers multiply the annual lease value of the automobile by the percentage of personal miles—out of total miles—driven by the employee. This amount is also subject to a fuel adjustment. For this rule, automobiles include trucks and vans, as specified by an IRS table on page 26 of Publication 15-B, that bases annual lease value on an automobile’s FMV.
Fleet-Average Value Rule
This rule applies to employers operating a fleet of 20 or more qualifying automobiles. It allows them to use an average annual lease value for every qualifying vehicle in the fleet when applying the automobile annual lease valuation rule.
The fleet-average value rule and the simple cents-per-mile rule aren’t available 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. 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.
TCJA-Induced Amendments
The new proposed regulations are consistent with IRS Notice 2019-08, issued in early 2019, and significantly raise the base values to reflect amendments made by the TCJA. The law changes the price-inflation measure for automobiles, including trucks and vans. It also substantially increases the maximum annual dollar limitations on depreciation deductions for passenger automobiles, based on the depreciation of a passenger automobile with a cost of $50,000 inflation adjusted annually—up from $12,800—over a five-year recovery period.
The proposed regulations are also consistent with Notice 2019-34 and allow the base values for purposes of the fleet-average and vehicle center-per-mile valuation to be adjusted annually for 2019 and future years, using the new price inflation measure.
The Latest Revisions
Vehicles and automobiles that are first made available to employees for personal use in calendar year 2019 will have a $50,400 maximum value under cents-per-mile and fleet-average value rules.
Under the proposed 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 (FAVR) plan—an alternative to the business standard-mileage rate.
Additional Employer Relief
The proposed regulations also provide relief to employers that previously didn’t qualify for the cents-per-mile rule due to a vehicle’s FMV exceeding the permissible maximum value under the earlier rules.
Under proposed regulations, the employer may first adopt the cents-per-mile valuation rule for 2018 or 2019 based on the maximum value of a vehicle for 2018 or 2019. However, employers that adopt the cents-per-mile rule generally must continue to use it for all subsequent years in which the vehicle qualifies. That said, an employer can use the commuting valuation rule for any year the vehicle qualifies.
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.
Personal-Use Income
Notice 2019-34 confirms that employers can use the flexible guidelines in Announcement 85-113 to determine when personal-use income is deemed paid. That means employers may use the rules in that guidance, the adjustment process, or the refund-claim process to correct any overpayment of federal employment taxes resulting from application of the notice’s transition relief.
Additional Requirements
It’s important to note that merely satisfying the maximum value limit doesn’t allow 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. That’s because both rules come with other requirements that can prove difficult to meet.
For example, the cents-per-mile rule is generally available only if one or more of the following is true:
- The employer reasonably expects the vehicle to be regularly used in its trade or business throughout the calendar year
- The vehicle meets the mileage test
We’re Here to Help
For assistance determining the appropriate valuation method for your circumstances or to learn more about changes to the cents-per-mile and fleet-average value rules, contact your Moss Adams professional.