On January 4, 2021, the IRS released Notice 2021-7, which provides unique and temporary flexibility regarding the valuation of employees’ personal use of employer-provided automobiles. Specifically, the IRS Notice provides temporary relief for employers using the automobile lease valuation rule for 2020 by allowing employers in certain circumstances to switch to the vehicle cents-per-mile rule as of March 13, 2020. Depending upon the specific facts and circumstances surrounding employees’ personal use of the organization’s automobiles, this flexibility could provide tax savings to the organization and its employees for 2020.
The Notice states in part:
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 compared to prior years. In contrast, 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.
Taking advantage of this temporary option will affect the amount of taxable wages reported on 2020 Forms W-2 for employees who use an employer-provided vehicle partially for business and partially for personal purposes. As many employers are finalizing 2020 payroll information now, we recommend that nonprofit employers immediately evaluate whether their organizations and their employees may benefit from the flexibility this notice offers.
If an employer provides an employee with an automobile that is available to the employee for personal use, the value of the personal use must generally be included in the employee’s taxable wages and reported on Form W-2. As further described in our whitepaper linked below, there are several valuation rules that an employer may use to calculate the value of the personal use of employer-provided automobiles, including the “general valuation rule” (based on a facts and circumstances determination); the “vehicle cents-per-mile valuation rule”; the “automobile lease valuation rule”; and the “commuting valuation rule”. Historically, the automobile lease valuation rule has been the most common method used by our clients because of certain historical limitations related to the use of the commuting valuation rule and the vehicle cents-per-mile valuation rule, as well as the subjectivity of the general valuation rule.
However, in 2018, the Tax Cuts and Jobs Act (TCJA) made a change to the requirements necessary to use the vehicle cents-per-mile valuation method, making the method more widely usable. The cents-per-mile valuation rule must typically be adopted for a vehicle as of the first day on which the vehicle is used by an employee for personal use. Additionally, federal tax regulations require that the valuation methodology chosen by an employer must be used consistently. Employers were not generally able to switch immediately to the cents-per-mile valuation method after the passage of the TCJA on vehicles for which they were already using the annual lease valuation rule. They could generally use the cents-per-mile rule with respect to new vehicles placed in service on or after January 1, 2018. (Other specific criteria apply for using the cents-per-mile valuation rule including, but not limited to, a maximum value for the automobile on the first date that it is made available to an employee for personal use. See our whitepaper linked below for more details.)
In certain situations, the vehicle cents-per-mile valuation rule may result in a lower valuation than the automobile lease valuation rule (resulting in potential tax savings for both the employer and employee). For much of 2020 and possibly part of 2021, in situations where employees were supplied with employer-provided automobiles that were used very little for business, the valuation of personal use under the cents-per-mile valuation method may be significantly lower.
Notice 2021-7 allows an employer that has historically utilized the annual lease valuation rule to utilize the vehicle cents-per-mile valuation method for qualifying vehicles beginning March 13, 2020. (They must pro-rate the personal use value under the annual lease value method for the period from January 1, 2020 through March 12, 2020.) Employers may choose to revert back to the annual lease valuation rule for 2021 or continue using the vehicle cents-per-mile valuation method in 2021 (assuming the arrangement otherwise meets the requirements for valuation under that method). The method chosen for 2021 must generally be used for all subsequent years so long as the arrangement continues to qualify for valuation under that method.
For more information on valuation of the personal use of employer-provided vehicles, see our whitepaper available here, which has been updated to include the relevant guidance summarized herein.