When the COVID-19 pandemic brought in-person business activities to a standstill last year, it curbed the use of many employer-provided vehicles for business purposes.
Recognizing that this will cause a major shift in the ratio between personal and business use of vehicles when calculating income and employment tax, the IRS is providing relief from the valuation method consistency rules for 2020 and 2021 tax years.
As background, employers that provide vehicles for their employees are allowed to exclude the value that would be otherwise deductible if the employee paid for the vehicle’s use. To determine this value, employers are normally required to use the same valuation method each year.
IRS Notice 2021-7 provides relief from this consistency rule and gives eligible employers who normally use the lease valuation method the option to apply the cents-per-mile method instead. This relief is significant because the cents-per-mile method is based on the IRS’s standard mileage rate multiplied by the total miles used for personal purposes. The lease valuation method, on the other hand, is determined based on the ratio of personal use to the total miles the automobile was used during the year.
This relief from the consistency rules is applicable to vehicle use beginning on March 13, 2020 through the end of 2021. It is available for:
- Employers who reasonably expected that a vehicle would be regularly used in the employer’s trade or business, but due to COVID-19 the automobile was not regularly used in the employer’s trade or business
- Vehicles that have a fair market value of $50,400 or less in 2020 (adjusted for inflation in 2021)
- Employees whose employers choose the alternative method (employees can choose the alternative method, effective on the date the method is adopted by the employer)
Employers who normally use the lease valuation method must still use that method for vehicle use between January 1 and March 12, 2020. In 2021, they have the option to continue using the alternative cents-per-mile method or revert back to the lease valuation method.
