SECTION 3. FULL EXCLUSION FOR

QUALIFIED AUTOMOBILE DEMONSTRATION USE

Q–8. What is the full exclusion for qualified automobile demonstration use?

A–8. As noted above, section 132(j)(3) specifically provides that “qualified automobile demonstration use” is treated as a working condition fringe. Generally, “qualified automobile demonstration use” is the use of a demonstration automobile by a full-time salesperson if the specific restrictions described in Question and Answer 9 are observed. If there is “qualified automobile demonstration use,” the value of the use of the demonstration automobile is excluded from the full-time salesperson’s wages. As a result, the salesperson will not owe income or FICA taxes on the value of use and the employer will not be required to withhold income taxes or pay FICA taxes with respect to the value of the use.

Q–9. What are the requirements for the full exclusion of automobile demon- stration use by a full-time salesperson?

A–9. The requirements for the full exclusion of automobile demonstration use by a full-time salesperson contained in section 132(j)(3) of the Code are as follows:

a. The use must be in the sales area in which the automobile dealer’s sales office is located.

b. The use must be provided primarily to facilitate the salesperson’s performance of services for the employer.

c. There must be substantial restrictions on the personal use of the automobile by the salesperson.

Under Treas. Reg. § 1.132–5(o)(4), substantial restrictions on the personal use of a demonstration automobile exist when all of the following conditions are satisfied:

a. Use by individuals other than the full-time salesperson ( e.g., the salesperson’s family) is prohibited;

b. Use for personal vacation trips is prohibited;

c. The storage of personal possessions in the automobile is prohibited; and

d. The total use by mileage of the automobile by the salesperson outside the salesperson’s normal working hours (“personal use”) is limited.

To use the simplified full and partial exclusion methods contained in this revenue procedure, the employer must also have a written policy limiting the use of the demonstration automobile. To use the full exclusion method, the employer must also determine that the personal use of the vehicle is limited to establish that the restrictions provided by the Code and regulations are satisfied.

Q–10. What is the treatment if the requirements for the full exclusion are not met?

A–10. If the use of the demonstration automobile by one or more employees does not satisfy the requirements for full exclusion, the employer must include some or all of the value of the use of the vehicle in the gross income of those employees using the methods for partial exclusion or full inclusion described in section 5 and 6, respectively, below.