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Pursuant to Section 61(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), fringe benefits are included in gross income. Section 1.61-21(a)(1) of the Treasury Regulations (the "Regulations") lists a number of illustrative examples of fringe benefits, namely employer-provided automobiles. Generally, the amount to be included in income is the fair market value of the property at the time of the transferred. However, the amount to be included in income is reduced by any amount paid by the employee, such as in the case of bargain purchases by employees, and by any amount excluded from gross income by another provision of the Code.
Overview and the "General Rule"
There are four possible valuation options afforded to employers and/or to employees under the Regulations that illuminate Section 61(a)(1) of the Code as it pertains to employer provided vehicles.
The first option a taxpayer has is the "general rule" which prescribes a value equal to the amount the employee would have to pay in an arm's-length transaction on the basis of all the facts and circumstances. Reg. Section 1.61-21(b)(2). The amount properly includable in the gross income of the employee under this valuation method is the value determined pursuant to an arm's-length transaction multiplied by the percentage of personal use. See Reg. Section 1.132-5(b)(1)(i) and the illustrative example contained therein.
Depending on the facts and circumstances, for fringe benefits provided after December 31, 1992, the "special valuation rules" (discussed below) can be used for income tax, employment tax, and reporting purposes. Reg. Section 1.61-21(c)(1)(ii).
Automobile Lease Valuation Rule
The first "special valuation rule" is the automobile lease valuation rule. The provisions governing this valuation method are found in Reg. Section 1.61-21(d). If the taxpayer provides an employee with a vehicle for the entire calendar year, the value of the benefit is the annual lease value (the "ALV") of the automobile. Reg. Section 1.61-21(d)(1)(i). The ALV is calculated by determining the fair market value on the date the vehicle is made available to the employee by the taxpayer for personal use and by plugging this figure into the table found in Reg. Section 1.61-21(d)(2)(iii). Reg. Section 1.61-21(d)(2)(i). The amount included in the gross income for the employee is the amount determined under the table multiplied by the percentage of personal use by the employee. See Reg. Section 1.132-5(b)(1)(i) and the illustrative example contained therein.
This method of valuation includes the value of the vehicle maintenance and insurance costs regardless of whether the taxpayer provides these services. See Reg. Section 1.61-21(d)(3)(i). These costs are built into the figure that is determined pursuant to the table found in Reg. Section 1.61-21(d)(2)(iii). If the taxpayer does not provide maintenance or insurance for the vehicle, neither the taxpayer nor the employee may reduce the ALV by the cost to the employee of such maintenance and insurance.
Vehicle Cents-Per-Mile Valuation Rule
The second "special valuation" method is the vehicle cents-per-mile rule. For passenger automobiles provided to employees where the taxpayer reasonably expects the vehicle will be regularly used in the it's trade or business throughout the calendar year or where the vehicle is actually driven more than 10,000 miles and used primarily by employees, the taxpayer can value the fringe benefit based upon the cents-per-mile rule. See Reg. Section 1.61-21(e)(1). However, Reg. Section 1.61-21(e)(1)(iii)(A) provides that for passenger automobiles first made available after 1988 to any employee of the taxpayer for personal use, the value of the use of the passenger automobile may not be determined under the vehicle cents-per-mile valuation rule for a calendar year if the fair market value of the passenger automobile on the first date the passenger automobile is made available to the employee exceeds $12,800 as adjusted by Section 280F(d)(7), the automobile price inflation adjustment. Therefore, if the fair market value of vehicle placed into service exceeds $12,800, adjusted pursuant to this Code provision, then the cent-per-mile valuation method cannot be employed in determining the amount of gross income to the employee for income tax purposes and to the taxpayer for employment tax purposes.
If the cents-per-mile valuation method is available and chosen by the taxpayer, then the value of the fringe benefit provided in the calendar year is the standard mileage rate provided in the applicable Revenue Ruling and Revenue Procedure (the "cents-per-mile rate") multiplied by the total number of miles the vehicle is driven by the employee for personal purposes. See Reg. Section 1.61-21(e)(1) and the illustrative example contained therein. There is no other figure added to this because the cents-per-mile rate incorporates all other employer expenses such as maintenance and insurance into it.
Commuting Valuation Rule
The third, and final "special valuation" rule is the commuting valuation rule. Pursuant to Reg. Section .1.61-21(f)(1), there are five criteria that must be met in order for the personal use of the employer provided vehicle to be determined under the commuting valuation rule: the vehicle is owned or leased by the employer and is provided to one or more employees for use in connection with the employer's trade or business and is used in the employer's trade or business; for bona fide noncompensatory business reasons, the employer requires the employee to commute to and/or from work in the vehicle; the employer has established a written policy under which neither the employee, nor any individual whose use would be taxable to the employee, may use the vehicle for personal purposes, other than for commuting or de minimis personal use (such as a stop for a personal errand on the way between a business delivery and the employee's home); except for de minimis personal use, the employee does not use the vehicle for any personal purpose other than commuting; and the employee required to use the vehicle for commuting is not a control employee of the employer. Reg. Section 1.61-21(f)(1).
If these five requirements are met, then the value of the employer-provided vehicle may be determined under the commuting valuation rule.
About the Author
Matthew P. McLaughlin is an associate with the Jackson, Mississippi office of Balch & Bingham LLP where he focuses his practice on advising individual clients, emerging businesses and existing companies on real estate related matters, federal and state financing incentives as well as representing clients in mergers and acquisitions. Mr. McLaughlin is admitted to practice in the State of Mississippi and is a member of the American Bar Association Sections of Business Law, Taxation and Real Property, Probate and Trust Law.