Employees generally must include in income the fair market value (FMV) of their personal use (including commuting) of an employer-provided auto (Regs. Sec. 1.61-21(a)(1)). The value of this fringe benefit can be determined under either a general or special valuation rule (assuming the requirements are met), as explained later in this discussion.
If the personal use of an employer-provided auto is de minimis, or if the employee pays fair value for the personal use, the employee will recognize no income (Regs. Secs. 1.132-6 and 1.61-21(b)). Under Sec. 132, a de minimis fringe benefit is one that has such a small value that accounting for it would be impractical. In addition, Regs. Sec. 1.132-6(e)(2) provides that commuting use of an employer-provided auto more than one day a month is not de minimis.
One frequently contested issue regarding a shareholder/employee’s personal use of an employer-provided automobile is the treatment of personal use as compensation (which is deductible by the C corporation) versus treatment as a constructive dividend (which is not deductible). The compensatory nature of the personal use of an auto should be well documented in the corporate minutes if the corporation wants to deduct the auto expenses.
Tax treatment of employer
An employer is not allowed an income tax deduction for any expense incurred, or any payment or reimbursement, for providing transportation to an employee in connection with travel between the employee’s residence and principal place of employment, except as necessary for ensuring the safety of the employee when unsafe conditions, as described in Regs. Sec. 1.61-21(k)(5), exist for the employee (Sec. 274(l)(1); Regs. Sec. 1.274-14(b)). The final regulations are silent on the employer’s deduction of the expenses for operating a vehicle that has some personal use, even if the personal use portion is minimal. Additional guidance on whether any amount of commuting use can be disregarded as de minimis would be welcome. In the interim, employers that allow the personal use of an auto that includes some commuting use should consider allocating a portion of the vehicle’s operating expenses to that personal use and not deduct those costs.
Taxing an employee’s personal use
Under the general valuation rule, the value of an employer-provided auto is what it would cost the employee to lease a comparable car for the same period the automobile in question is available to him or her. A cents-per-mile method cannot be used unless it can be shown that a comparable automobile could have been rented on a cents-permile basis (Regs. Sec. 1.61-21(b)(4)).
However, the employer can elect to use special valuation rules and can use different rules for different automobiles (assuming the requirements for each method are met) (Regs. Secs. 1.61-21(c)(2)(iii) and (c)(3)). Thus, the employer could use the automobile lease value (ALV) method (described below) to account for an automobile provided to one employee and the special commuting value method (described below) for another employee’s automobile. These special methods can be beneficial because they can reduce the amount of taxable income attributable to an employee’s personal use of a company-provided auto.
Using the ALV method
The ALV rule (also known as the table-value method) uses a vehicle’s annual lease value as the FMV of the total annual use of a company auto to determine the amount of an employee’s additional compensation for personal use of an auto. The ALV is determined from a table provided by the IRS in Regs. Sec. 1.61-21(d)(2)(iii) and is based on the automobile’s FMV on the first date the automobile is available to the employee for personal use. Cost can be used as FMV only if the automobile was purchased in an arm’s-length transaction. If the employer leases rather than owns the automobile, the employer can use the manufacturer’s suggested retail price (including sales tax, title, and other purchase expenses) less 8% to determine the FMV for calculating the ALV. Alternatively, the ALV may be determined by reference to the automobile’s retail value as reported by a nationally recognized pricing source (Regs. Secs. 1.61-21(d)(5)(ii)(B), (C), and (5)(iii)). In addition, the employer can use the manufacturer’s invoice price (including options) plus 4% as an estimate of FMV (Notice 89-110).
Example: N Corp. leases a car and furnishes it to the assistant sales manager. The manufacturer’s suggested retail price (i.e., the “sticker price”) of the car is $35,500. Sales tax and other fees if the auto were purchased for the suggested retail price would be $3,250. N can use a safe harbor FMV of $35,650 for the leased auto, as shown in the chart “Determining Safe Harbor FMV,” below.
Alternatively (or if the auto was previously owned), N could use the retail price of the leased auto as reported in a nationally recognized publication or website (e.g., the National Automobile Dealers Association) or the manufacturer’s invoice price (including options) plus 4%.
The ALV includes maintenance and insurance costs but not fuel. If fuel is provided by the employer for personal use, the value of the fuel will have to be included in income in addition to the ALV. The value of fuel provided in-kind is its FMV, based on facts and circumstances. Alternatively, fuel provided in-kind can be valued at 5.5 cents per mile for miles driven in the United States, Canada, or Mexico. The value of fuel costs reimbursed by or charged to the employer is the amount reimbursed or charged if the fuel was purchased at arm’s length (Regs. Sec. 1.61-21(d)(3)(ii)).
Valuation of the personal use of an automobile is based on availability, not actual use. Thus, if the automobile was available for personal use for the whole year, including the employee’s two-week vacation period, the employee must include in income the total ALV amount. If this method is used and the automobile is continuously available to the employee for less than one year but for at least 30 days, the ALV is prorated based on the period the vehicle was available (i.e., number of days of availability ÷ 365 × ALV).
If the automobile is used for less than 30 days (i.e., continuous availability is less than 30 days), the value of the personal use is based on the daily lease value (the ALV multiplied by four times the number of days of availability divided by 365). The employer may make an election to treat it as if it were available for 30 days if that treatment results in a lower valuation (Regs. Secs. 1.61-21(d)(4)(i), (ii), and (iii)).
Using the commuting value method
If an employee is required to commute in an employer-provided vehicle, the commuting valuation rule can be used to determine the value of the personal commuting use to include in the employee’s taxable compensation. Commuting use of an auto may be valued at $3 per round trip ($1.50 per one-way commute) if the following requirements are met (Regs. Secs. 1.61-21(f)(1) and (f)(3)):
■ The auto must be owned or leased by the employer and provided for use in the employer’s trade or business;
■ The employer must, for bona fide noncompensatory business reasons, require the employee to commute in the automobile (e.g., 24-hours on-call);
■ The employer must have a written policy under which neither the employee, nor any individual whose use would be taxable to the employee (e.g., the employee’s spouse), may use the auto for personal purposes other than commuting or de minimis personal use;
■ Except for de minimis personal use, the employee does not use the auto for any personal purpose other than commuting; and
■ The employee required to use the auto for commuting must not be a control employee of the employer (as defined in Regs. Sec. 1.61-21(f)(5)).
Note: The commuting valuation rule is applicable only for determining the amount included in the employee’s income. It is not applicable for determining the employer’s income tax deduction for the operating expenses of the vehicle.
Using the cents-per-mile method
The standard mileage rate may be used to determine the value of an employer-provided automobile. However, this rule may be used only for autos that the employer expects will be regularly used in the employer’s trade or business throughout the year, or for autos that are actually driven at least 10,000 miles in that year and used primarily by employees. This special valuation method cannot be used if the auto’s FMV when first made available to any employee for personal use exceeds the inflation-adjusted annual limit. For 2022, the limit is $56,100 for a passenger automobile, van, or truck (Notice 2022-3). The cents-per-mile valuation includes insurance, maintenance, and fuel. If fuel is not provided by the employer, the cents-per-mile rate may be reduced by no more than 5.5 cents per mile (Regs. Sec. 1.61-21(e)(3)).
Meeting the requirements to use special valuation methods
A special valuation rule may not be used by either the employer or employee unless one of the following requirements is satisfied (Regs. Sec. 1.61-21(c)(3)(ii)):
■ The employer treats the value of the benefit as wages for reporting purposes within the time for filing the tax return for the tax year (including extensions) in which the benefit is provided;
■ The employee includes the value of the benefit in income within the time for filing the tax return for the tax year (including extensions) in which the benefit is provided;
■ The employee is not a control employee; and
■ The employer demonstrates a good-faith effort to treat the benefit correctly for reporting purposes.
An employee may use a special valuation rule if (1) the employer uses that rule or (2) the employer does not treat the value of the benefit as wages for reporting purposes, but one of the second through fourth conditions above for using a special valuation rule exists (Regs. Sec. 1.61-21(c)(2)(ii)). An employee may always use the general valuation rule even if the employer uses a special valuation rule. If an employer and employee use a special rule, the employee’s gross income includes the amount determined by the employer under the special rule reduced by the sum of:
■ Any amount reimbursed by the employee to the employer; and
■ Any amount excludable from income under another income tax provision of the Code.
Once a special valuation method has been elected for a particular auto, it must be used for the life of that auto, except in the case of the commuting valuation method, which can be used for any qualifying period. An exception applies to employers that properly elect to use a special valuation method other than the cents-per-mile rule because the FMV of the auto exceeds the applicable limits for use of the cents-per-mile method (Notice 89-110).
Contributor
Trenda B. Hackett, CPA, is an executive editor with Thomson Reuters Checkpoint. For more information about this column, contact thetaxadviser@aicpa.org.
This case study has been adapted from Checkpoint Tax Planning and Advisory Guide’s Closely Held C Corporations topic. Published by Thomson Reuters, Carrollton, Texas, 2022 800-431-9025); tax.thomsonreuters.com).
