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IRS Has Provided Some Relief for Computing Personal Use of an Employee’s Leased Automobile

Posted by Jonathan Ciccotelli on Jan 6, 2021 2:48:30 PM

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Certain employers and employees who use the automobile lease valuation rule to determine the value of an employee’s personal use of an employer-provided automobile may switch to the vehicle cents-per-mile method as a result of the COVID-19 pandemic.

Determining Personal Use Value

Under the general rule, an employer who provides an employee a vehicle must adopt one of the methods below to determine the value of an employee’s personal use of the vehicle:

    • Automobile lease valuation rule; or
    • Vehicle cents-per-mile valuation rule.

In certain cases, the commuting valuation rule may be used as a third method.

The employer and the employee must use the chosen valuation method consistently (in each subsequent year), except that the employer and the employee may use the commuting valuation rule if the requirements for it are met.

Cents-per-mile Method More Accurately Reflects Income During Pandemic

Due to the pandemic, many employers suspended business operations or implemented telework arrangements for employees, reducing business and personal use of employer-provided automobiles. This has increased the lease value to be included in an employee’s income for 2020 compared to prior years. In contrast, the vehicle cents-per-mile valuation rule includes in income only the value that relates to actual personal use, providing a more accurate reflection of the employee’s income in these circumstances.

Relief for Users of Lease Valuation Rule

On account of the unexpected onset of COVID-19, the IRS is allowing an employer using the automobile lease valuation rule for the 2020 calendar year to instead use the vehicle cents-per-mile valuation rule beginning on March 13, 2020, if:

    • At the beginning of 2020, 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; and
    • Due to the COVID-19 pandemic the automobile was not regularly used in the employer’s trade or business throughout the 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 that switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule during 2020 may:

    • Revert to the automobile lease valuation rule for 2021; or
    • Continue using vehicle cents-per-mile valuation rule for 2021.

In either option, the special valuation rule used in 2021 must be used for all subsequent years.

Employees must use the same special valuation rule used by their employer. Please contact us with any questions. 

Topics: Tax Planning & Strategies, Accounting & Auditing, Accounting and Tax Resource, COVID-19

Jonathan Ciccotelli

Jonathan Ciccotelli

Jonathan Ciccotelli is the Partner-In-Charge of Meaden & Moore’s Tax Services Group. For over 29 years, Jonathan has worked closely with private and public companies in manufacturing, transportation, distribution, construction, and retail under a variety of business structures, including S-corporations, C-corporations, consolidated groups, and limited liability companies. He enjoys running, cycling, and cheering on his kids at sporting events.

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