The IRS is providing temporary relief for company drivers who are determining the value of company-provided personal use vehicles through the annual lease value (ALV) and who may be experiencing potential tax consequences brought on by the COVID-19 pandemic.
The IRS announced its issuance of Notice 2021-7, which grants companies that allow use of the ALV method to determine personal use value to instead use a vehicle cents-per-mile valuation rule starting when COVID-19 was declared a pandemic on March 13, 2020. Personal use of company fleet vehicles is considered a taxable fringe benefit by the IRS that is treated as income.
Commonly used among fleets, the ALV methodology is when the annual lease value of an asset is provided in a table from the IRS. ALV taxable liability is based on a vehicle’s fair market value when it was first made available to an employee. A prorated portion of that value is then considered as the baseline for determining a driver’s taxable fringe.
During the shelter-in-place mandates, 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 company vehicle activity. As a result, many company vehicles incurred zero business miles and what mileage was accumulated was 100% personal.
“Since the Annual Lease Value method distorts the taxable benefit, use of an alternative IRS valuation method, called the ‘cents-per-mile’ rule, would yield a far more accurate valuation method in these unusual circumstances created by the pandemic. This alternative rule provides a much fairer result that more closely reflects the actual benefit to the employee,” NAFA said in a letter to the Senate Finance Committee in 2020 in an effort to mitigate the unintended tax consequences.
The initiative that led to this relief from the IRS was spearheaded by Bill Schankel, CAE, CEO of NAFA and Pat O’Connor, the long-time legislative counsel for NAFA Fleet Management Association. NAFA earlier in 2020 drafted letters to the IRS, the U.S. Senate Finance Committee and the House Ways and Means Committee to seek mitigation of this unintended tax liability for company drivers.
“I want to thank Pat, our Government Affairs Committee and several members that have worked for months to get this issue addressed,” said Schankel.
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. Companies should multiply the applicable annual lease value by a fraction, the numerator of which is the number of days from the start of 2020 and ending on March 12, 2020, and the denominator of which is 365.
For 2021, companies may revert to the ALV methodology or continue using the vehicle cents-per-mile valuation rule, provided certain requirements are met.
Because the ALV method is common among fleets, the unintended tax consequences could have impacted tens of thousands of employees due to pandemic-related changes in the work environment, NAFA said.