Company cars can increase the tax bills of employees who use them for both business and personal purposes, and the rules are complicated. The IRS is a stickler in enforcing the allocation rules but now they have simplified the process somewhat.
The Basics
Employers must value the personal use and include it in an employee’s income based on the vehicle’s fair market value. The IRS allows several special valuation methods, including the fleet-average annual lease valuation method and the cents-per-mile method. The use of these streamlined methods is limited based on the car’s cost, but now the IRS has published guidelines that increase the cost limitation making these valuation methods more available to employers. The new maximum value is designed to conform with the increased depreciation allowed business vehicles under the Tax Cuts and Jobs Act.
The new IRS proposed regulations and two related Notices do three things:
- Set a base value of $50,000 as the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules, effective for the 2018 calendar year forward.
- Adjust the $50,000 base value annually for inflation beginning in 2019, with the 2019 value set at $50,400.
- Provide transition rules for 2018 and 2019 for employers that did not qualify for special valuation because vehicles exceeded earlier value limitations.
The fleet-average valuation rule is available to employers operating a fleet of 20 or more vehicles. It uses the average annual lease value of all vehicles in the fleet to compute personal use. The annual lease value is based on an IRS table (see pg. 27 of IRS Publication 15-B) that calculates the annual value of leasing an automobile based on fair market value.
Under the cents-per-mile method, the number of miles the vehicle is driven for personal purposes is multiplied by the standard mileage rate, 58 cents in 2019, and the resulting amount is included in the employee’s income for the year. When the vehicle cents-per-mile valuation rule has been adopted for a vehicle, the employer must use that valuation for all later years. The exception is that the employer may switch to the commuting valuation rule (described below) in any year the vehicles qualifies.
Transition Rules Allow Employers to Requalify
Both the fleet-average value rule and the cents-per-mile method are restricted based on the value for the year the automobile was first made available to the employee for personal use. In 2017, the maximum value for the cents-per-mile rule was $15,900 for a passenger auto and $17,800 for a truck or van. The maximum value for the fleet-average value rule was $21,100 for a passenger auto and $23,300 for a truck or van. The new maximum is $50,000, adjusted for inflation for all vehicles.
Changes to Maximum Value limits
| 2017 Cents per mile valuation | 2017 Fleet average valuation | New Maximum values 2018 | 2019 indexed values | |
| Passenger autos | 15,900 | 21,100 | 50,000 | 50,400 |
| Trucks/vans | 17,800 | 23,300 | 50,000 | 50,400 |
The proposed regulations include transition rules allowing employers who did not qualify for fleet average or cents-per-mile valuation because vehicle values exceeded the earlier limits to requalify in 2018 and 2019 if the vehicles already in use meet the new, higher maximum FMV limit.
The IRS offers the following transition rules to make it possible for employers to change their valuation methods going forward:
Fleet-average valuation. If an employer did not qualify to use the fleet-average valuation rule before January 1, 2018 because the automobile’s fair market value exceeded the maximum value, the employer may adopt the fleet-average valuation rule for 2018 or 2019 if the fair market value of the automobile does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.
Cents-per-mile valuation. If an employer did not qualify to adopt the vehicle cents-per-mile valuation rule before calendar year 2018 because the FMV exceeded the maximum value, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 taxable year provided the fair market value does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.
But What if the Vehicle is for Commuting Only?
The commuting valuation rule is another special calculation method and values an employee’s use of the employer’s vehicle for commuting purposes only as $1.50 per one-way commute (e.g., from home to work or from work to home). Let’s look at the transition rule for this method. If before 2018 an employer using the commuting valuation rules did not qualify for the cents-per-mile valuation rule because the vehicle’s FMV exceeded the maximum, the employer may adopt the cents-per-mile rule for 2018 or 2019 as long as the vehicle’s FMV does not exceed the maximum ($50,000 on January 1, 2018, or $50,400 on January 1, 2019.) In addition, an employer that adopts cents-per-mile valuation may later switch to commuting valuation in if its vehicles qualify.
Taxpayers can rely on these regulations while the IRS is going through the finalization process. Public comments on the new regulations may be submitted through October 22, 2019 on www.regulations.gov. It is important to note that, although the new guidance expands opportunities for more streamlined valuation of employee personal use, the rules are detailed and it is best to consult with your tax advisor to determine which valuation method is best of your business.