Since 1984, personal use of a company vehicle is considered a taxable fringe benefit by the IRS that is treated as income. There are several “safe harbor” fringe benefit valuations to determine the personal use fringe benefit of an employer-provided vehicle.
The two methodologies used to calculate an employee’s tax obligation are either the annual lease value (ALV) or a cents-per-mile valuation. Most commercial fleets use the annual lease value methodology.
One impact of the COVID-19 pandemic was the creation of an unintended tax consequence using the ALV methodology that distorted the personal use taxation of employees assigned company-provided vehicles as a result of the shelter-in-place mandates.
During the pandemic, many companies suspended business operations and the usage of fleet vehicles. For other companies, employees were instead asked to work from home, which also greatly reduced the business activity of company vehicles. As a result, many company vehicles incurred zero business miles and what mileage was accumulated was 100% personal.
“What happened with shelter in place is suddenly these company vehicles were not being used. They were parked at home. There was some limited use of the vehicle, but, in many cases, the employee was working virtually from home. So, the number of business miles driven by the employee dropped dramatically during the shelter in place,” said Pat O’Connor, the long-time legislative counsel for the NAFA Fleet Management Association.
Because the ALV method is widely used by fleets, this unintended tax consequences would impact tens of thousands of employees due to the pandemic-induced decrease in business miles driven.
“There were few business miles being traveled during this shutdown and there were some personal miles, whether it was one mile, 10 miles, or 100 miles,” said O’Connor. “But under the annual lease value rule, what happened is all of those miles were considered personal use. If on a monthly basis the annual lease value was $1,000 and normally the personal use miles may have been 20% of the miles driven that month, you would have a personal-use charge of $200, but suddenly with the only miles being driven in that month were personal, the taxable fringe benefit became $1,000,” said O’Connor. “It was certainly an unintended consequence of the pandemic, something that neither the IRS nor the Treasury Department could have foreseen.”
This unintended tax consequence was brought to the attention of NAFA CEO Bill Schankel by a NAFA corporate fleet member. Schankel, in turn, contacted O’Connor informing him of the unintended tax consequence being caused by the shelter-in-place mandate. NAFA immediately launched an initiative that ultimately led to the relief from this unintended tax. The initiative was spearheaded by Schankel, O’Connor, the NAFA Government Affairs Committee, and several NAFA corporate fleet members who worked for months to get this issue addressed.
NAFA’s first outreach was to the IRS Counsel’s Office, specifically to the lawyers who handle tax-related personal use issues. NAFA also sent a formal request to the IRS commissioner to provide relief from this unintended tax consequence.
In addition, NAFA wrote letters to the U.S. Senate Finance Committee and the Ways and Means Committee of the U.S. House of Representatives in 2020 in an effort to mitigate the unintended tax consequences. These two tax-writing committees have oversight jurisdiction of the IRS. NAFA alerted each committee of the issue so they could discuss the unintended tax consequence with the IRS.
“Since the annual lease value method distorts the taxable benefit, use of an alternative IRS valuation method, the cents-per-mile rule, would yield a far more accurate valuation method in these unusual pandemic circumstances,” said O’Connor. “This alternative rule provides a much fairer result that more closely reflects the actual benefit to the employee.”
In addition to outreaches to the IRS, the Finance Committee of the U.S. Senate and the Ways and Means Committee of the U.S. House of Representatives, NAFA also reached out to the White House and made White House staff aware of the unintended consequences.
“These communications were all designed to make sure we kept this issue on a front burner at the IRS,” said O’Connor. “I had a number of conversations with the Internal Revenue Service. As you can imagine, any time you’re asking for tax relief of any kind they get suspicious.”
Under current IRS regulations, companies can’t use a combination of the annual-lease rule and the cents-per-mile rule.
“You can’t combine the two during the course of the year. NAFA suggested allowing a fleet to use the cents-per-mile rule to be able to charge the driver for his or her actual personal use without skewing the personal use as happens with the annual lease value,” said O’Connor.
NAFA proposed that the IRS provide a waiver under IRS regulations and to propose a regulatory change would require rule making that could take a year or more.
“We officially requested that waiver from the commissioner of the IRS,” said O’Connor. “There’s an executive order from the White House to the various federal agencies to ease regulatory burdens any time there’s an unintended consequence of an existing regulation because of the pandemic.”
O’Connor continued to “nudge” the IRS Counsel’s Office to resolve this, primarily by getting support from the Congressional tax-writing committees. NAFA stayed in contact with the two Congressional tax-writing committees, with O’Connor talking with them on almost an every-other-day basis to get them to weigh in on this issue.
“One of the things you always need to do when you’re trying to resolve a regulatory issue like this is you’ve got to keep it on the front burner. Simply sending a letter is not sufficient. We sent a letter. Now, we had to nudge them,” said O’Connor.
Because the shelter-in-place mandates distorted the annual lease value rule, NAFA asked the IRS if it could make an exception for 2020 to allow a fleet to switch from annual lease value to the cents-per-mile rule.
“Under the current IRS regulations, a company has a choice of using the annual lease value for personal use or a cents-per-mile for personal use. Those are two of the options. But you can’t use both. You can only use one,” said O’Connor.
Ultimately, NAFA successfully resolved the unintended tax consequence by gaining a temporary waiver from the IRS. On Jan. 4, 2021, the IRS announced its issuance of Notice 2021-7, which temporarily grants companies that are using the ALV method to determine personal use value to instead use the vehicle cents-per-mile valuation rule starting when COVID-19 was declared a pandemic on March 13, 2020.
Employers that choose to switch from the annual lease valuation rule to the cents-per-mile valuation rule in the 2020 calendar-year must also prorate the value of the vehicle using the automobile lease valuation rule for Jan. 1, 2020 through March 12, 2020, according to the IRS. Employers are not required to switch from annual lease value to cents-per-mile, but the temporary waiver gave them the option to do so.