Do you provide company-owned vehicles to your employees? Are you and/or your employees using the automobile lease valuation rule? As a result of the COVID-19 pandemic, the IRS released Notice 2021-7, which grants temporary relief to those who use the automobile lease valuation rule. If certain requirements are met, employers may use the vehicle cents-per-mile valuation rule instead, effective as of March 13, 2020. Employers may choose to return to the automobile lease valuation rule for 2021 or continue to use the vehicle cents-per-mile rule.
When an employer provides its employee with a company-owned vehicle, the value of the personal use portion of the vehicle must be included in the employee’s gross income. Despite the decreased business and personal use of employer-provided vehicles arising from COVID-19, employers that use the automobile lease valuation rule have noted an increase in the value required to be included in an employee’s income for 2020 compared to prior years. However, the vehicle cents-per-mile valuation rule considers only the portion that relates to actual personal use when determining the value to be included in gross income. As a result, this valuation method may deliver a more accurate representation of the employee’s income.
Employers may choose to switch to the vehicle cents-per-mile valuation rule beginning on March 13, 2020 if, at the beginning of the 2020 calendar year, the following requirements are met:
The employer was using the automobile lease valuation rule for the 2020 calendar year.
The employer reasonably expected that an automobile with a fair market value not exceeding $50,400 would be regularly used in the employer’s trade or business throughout the year, but due to the COVID-19 pandemic, the automobile was not regularly used in the employer’s trade or business throughout the year.
Employers that decide to make the switch must prorate the value of the vehicle using the automobile lease valuation rule for January 1, 2020 through March 12, 2020 (72 days) and may begin using the vehicle cents-per-mile valuation rule on March 13, 2020. The prorate calculation can be done by multiplying the applicable Annual Lease Value by (72/365). Employees using the automobile lease valuation rule must also make the switch to the vehicle cents-per-mile valuation rule if their employer does so.
As for 2021 reporting, employers that decided to switch special valuation rules may return to the automobile lease valuation rule (assuming they still meet the applicable requirements of section 1.61.-21(d)), or continue using the vehicle cents-per-mile valuation rule for 2021, if they meet the requirements of section 1.61-21(e). Consequently, the special valuation rule chosen for 2021 must continue to be used by the employer and the employees for all subsequent years.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.
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