Part I

26 CFR 1.61-21 Taxation of Fringe Benefits

T.D. 9893

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Determination of the Maximum Value of a Vehicle for Use with the Fleet-Average and Vehicle Cents-Per-Mile Valuation Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document sets forth final regulations regarding special valuation rules for employers and employees to use in determining the amount to include in an employee’s gross income for personal use of an employer-provided vehicle. The final regulations reflect changes made by the Tax Cuts and Jobs Act (TCJA).

DATES: Effective Date: These regulations are effective February 5, 2020.

Applicability Date : For dates of applicability, see §1.61-21(d)(5)(v)(H) and §1.61-21(e)(6).

FOR FURTHER INFORMATION CONTACT: Stephanie Caden at (202) 3174774 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

If an employer provides an employee with a vehicle that is available to the employee for personal use, the value of the

personal use must generally be included in the employee’s income under section 61 of the Internal Revenue Code (the Code). In addition, benefits paid as remuneration for employment, including the personal use of employer-provided vehicles, generally are wages for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA) and the Collection of Income Tax at Source on Wages (federal income tax withholding). Sections 3121(a), 3306(b), and 3401(a).

The amount that must be included in the employee’s income and wages for the personal use of an employer-provided vehicle generally is determined by reference to the vehicle’s fair market value (FMV). However, for many years, §1.61-21 has provided special valuation rules for employer-provided vehicles (the prior final regulations). ¹ If an employer chooses to use a special valuation rule, the special value is treated as the FMV of the benefit for income tax and employment tax purposes. §1.61-21(b)(4). As discussed further in this Background section of this preamble, two such special valuation rules, the fleet-average valuation rule and the vehicle cents-per-mile valuation rule, are set forth in §1.61‑21(d)(5)(v) and §1.6121(e), respectively. These two special valuation rules are subject to limitations, including that they may be used only in connection with vehicles having values that do not exceed a maximum amount set forth in the regulations.

Section 1.61-21(e)(1)(iii)(A) of the prior final regulations provided that the vehicle cents-per-mile valuation rule could be used only to value the personal use of a vehicle having a value no greater than $12,800 (the sum of the maximum recovery deductions allowable under section 280F(a)(2) for the recovery period of the vehicle). Section 1.61-21(d)(5)(v)(D) of the prior final regulations provided that the fleet-average valuation rule could be used only to value the personal use of vehicles having values no greater than $16,500. (The fleet-average valuation rule uses the term “automobile” rather than

“vehicle.” For convenience, this preamble uses the term “vehicle” except in specific discussions of the fleet-average valuation rule or the section 280F depreciation limitations.) Sections 1.61-21(d)(5)(v)(D) and 1.61-21(e)(1)(iii)(A) of the prior final regulations provided that each of these maximum values was adjusted annually pursuant to section 280F(d)(7).

1. The Fleet-Average Valuation Rule

The fleet-average valuation rule is an optional component of a special valuation rule called the automobile lease valuation rule set forth in §1.61-21(d). Under the automobile lease valuation rule, the value of the personal use of an employer-provided automobile available to an employee for an entire year is the portion of the annual lease value determined under the regulations (Annual Lease Value) relating to the availability of the automobile for personal use. Furthermore, provided the FMV of the automobile does not exceed the maximum value permitted under §1.61-21(d) (5)(v), an employer with a fleet of 20 or more automobiles may use a fleet-average value for purposes of calculating the Annual Lease Value of any automobile in the fleet.

The fleet-average value is the average of the fair market values of all the automobiles in the fleet. However, §1.61-21(d) (5)(v)(D) of the prior final regulations provided that the value of an employee’s personal use of an automobile could not be determined under the fleet-average valuation rule for a calendar year if the FMV of the automobile on the first date the automobile was made available to the employee exceeded the base value of $16,500, as adjusted annually pursuant to section 280F(d)(7). Section 1.61‑21(d)(5) (v)(D) provided that the first such adjustment would be for calendar year 1989, subject to minor modifications to the section 280F(d)(7) formula specified in the regulations. In other words, under the prior final regulations, the maximum value for use of the fleet-average valuation rule

T.D. 8256, 54 FR 28576, July 6, 1989, as amended by T.D. 8389, 57 FR 1868, Jan. 16, 1992; T.D. 8457, 57 FR 62192, Dec. 30, 1992; T.D. 9597, 77 FR 45480, Aug. 1, 2012; T.D. 9849, 84 FR 9231, March 14, 2019. **Bulletin No. 2020–9** **449** **February 24, 2020** was the base value of $16,500, as adjusted annually under section 280F(d)(7) every year since 1989. Prior to enactment of TCJA, the automobile price inflation adjustment of section 280F(d)(7)(B) was calculated using the “new car” component of the Consumer Price Index (CPI) “automobile component.” Beginning in 2005, the IRS began to calculate the price inflation adjustment for trucks and vans separately from cars using the “new truck” component of the CPI, and continued using the “new car” component of the CPI for automobiles other than trucks and vans. See Rev. Proc. 2005-48, 2005-32 I.R.B. 271. For 2017, the year of the enactment of TCJA, the maximum value for use of this rule was $21,100 for a passenger automobile and $23,300 for a truck or van. See Notice 2017-03, 2017-2 I.R.B. 368. Section 1.61-21(d)(5)(v)(B) provides that the fleet-average valuation rule may be used by an employer as of January 1 of any calendar year following the calendar year in which the employer acquires a sufficient number of automobiles to total a fleet of 20 or more, each one satisfying the maximum value requirement of §1.61‑21(d)(5)(v)(D). The Annual Lease Value calculated for automobiles in the fleet, based on the fleet-average value, must remain in effect for the period that begins with the first January 1 the fleet-average valuation rule is applied by the employer to the automobiles in the fleet and ends on December 31 of the subsequent calendar year. The Annual Lease Value for each subsequent two-year period is calculated by determining the fleet average value of the automobiles in the fleet as of the first January 1 of such period. An employer may cease using the fleet-average valuation rule as of any January 1. 2. _The Vehicle Cents-Per-Mile Valuation_ _Rule_ Another special valuation rule is the vehicle cents-per-mile rule in §1.61-21(e). Under §1.61-21(e), if an employer provides an employee with the use of a vehicle that the employer reasonably expects will be regularly used in the employer’s trade or business throughout the calendar year (or such shorter period as the vehicle may be owned or leased by the employ er), or that satisfies the requirements of §1.61‑21(e)(1)(ii) (i.e., the vehicle is actually driven at least 10,000 miles in the year and use of the vehicle during the year is primarily by employees), the value of the personal use may be determined based on the applicable standard mileage rate multiplied by the total number of miles the vehicle is driven by the employee for personal purposes. Section 1.61‑21(e)(1)(iii)(A) provides that the value of the personal use may not be determined under the vehicle centsper-mile valuation rule for a calendar year if the fair market value of the vehicle on the first date the vehicle is made available to the employee exceeds the sum of the maximum recovery deductions allowable under section 280F(a) for a five-year period for an automobile first placed in service during that calendar year (whether or not the automobile is actually placed in service during that year), as adjusted by section 280F(d)(7). The prior final regulations provided that, under this rule, with respect to a vehicle placed in service in or after 1989, the limitation on value was $12,800, as adjusted under section 280F(d)(7). In other words, under the prior final regulations, the maximum value of a vehicle for use of the vehicle centsper-mile valuation rule was the base value of $12,800, as adjusted annually under section 280F(d)(7) since 1989. As with the fleet-average valuation rule, beginning in 2005, the IRS calculated the price inflation adjustment for trucks and vans separately from cars. See Rev. Proc. 2005-48. For 2017, the maximum value for use of the vehicle cents-per-mile valuation rule was $15,900 for a passenger automobile and $17,800 for a truck or van. See Notice 2017-03. Section 1.61-21(e)(5)(i) states that an employer must adopt the vehicle centsper-mile valuation rule for a vehicle to take effect by the first day on which the vehicle is used by an employee of the employer for personal use (or, if another special valuation rule called the commuting valuation rule of §1.61-21(f) is used when the vehicle is first used by an employee of the employer for personal use, the first day on which the commuting valuation rule is not used). Section 1.61-21(e)(5)(ii) also provides, in part, that once the vehicle cents-per-mile valuation rule has been adopted for a vehicle by an employer, the rule must be used by the employer for all subsequent years in which the vehicle qualifies for use of the rule, except that the employer may, for any year during which use of the vehicle qualifies for the commuting valuation rule of §1.61-21(f), use the commuting valuation rule with respect to the vehicle. 3. _TCJA Changes and the Maximum_ _Vehicle Values for 2018 and 2019_ TCJA made the following amendments to the Code: (1) For owners of passenger automobiles, section 280F(a), as modified by section 13202(a)(1) of TCJA, imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. The amendments made by TCJA substantially increase the maximum annual dollar limitations on the depreciation deductions for passenger automobiles. The new dollar limitations are based on the depreciation, over a fiveyear recovery period, of a passenger automobile with a cost of $50,000 (formerly $12,800, as adjusted). (2) Section 11002(d)(8) of TCJA amended section 280F(d)(7)(B) effective for tax years beginning after December 31, 2017. Pursuant to these amendments, the price inflation amount for automobiles (including trucks and vans) is calculated using both the CPI automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component. a. _Notice 2019-08 – The Maximum Value_ _for 2018_ To implement the changes described above, Notice 2019-08, 2019-3 I.R.B. 354, provides interim guidance for 2018 on new procedures for calculating the price inflation adjustments to the maximum vehicle values for use with the special valuation rules under §1.61-21(d) and (e) using section 280F(d)(7), as modified by sections 11002 and 13202 of the TCJA. Notice 2019-08 states that the Treasury Department and the IRS anticipate that further guidance will be issued in the form of proposed regulations and expect that **February 24, 2020** **450** **Bulletin No. 2020–9** the regulations will be consistent with the rules set forth in Notice 2019-08.