In Notice 2021-7,[1] the IRS has granted relief to certain employers and employees using the automobile lease valuation rule to determine the value of an employee’s personal use of an employer-provided automobile.  The relief has been granted due to the impact of the COVID-19 pandemic.

The relief is summarized in the Notice as follows:

Due solely to the COVID-19 pandemic, if certain requirements are satisfied, employers and employees that are using the automobile lease valuation rule may instead use the vehicle cents-per-mile valuation rule to determine the value of an employee’s personal use of an employer-provided automobile beginning as of March 13, 2020. For 2021, employers and employees may revert to the automobile lease valuation rule or continue using the vehicle cents-per-mile valuation rule provided certain requirements are met.[2]

The Problem

The Notice notes the problem that has occurred as many employers have shut down offices and had employees telework due to the COVID-19 pandemic:

As a result of the pandemic, many employers suspended business operations or implemented telework arrangements for employees. Consequently, employers have indicated that business and personal use of employer-provided automobiles has been reduced for employees. However, due to the way in which the value of an employee’s personal use of an employer-provided automobile is computed using the automobile lease valuation rule under section 1.61- 21(d), employers have noted a resulting increase in the lease value required to be included in an employee’s income for 2020 compared to prior years.[3]

The key problem is that the overall value of the use of the vehicle is a fixed amount (ignoring any fuel paid for by the employer) under the lease valuation rule.  So the amount the employee pays tax on is based on the ratio of personal use to overall use of the vehicle, as opposed to the amount of personal use.  Thus, if the business use declines substantially, as it generally will during an extended period of having to isolate and conduct business remotely, the percentage of personal use may balloon even though the actual amount of personal use has not gone up—and, frankly, in 2020 due to lockdowns and social distancing, may very well have decreased.

Thus, the Notice points out:

In contrast, determining the value of an employee’s personal use of an employer-provided automobile using the vehicle cents-per-mile valuation rule results in income inclusion of only the value that relates to actual personal use, thereby providing a more accurate reflection of the employee’s income in these circumstances.[4]

There are various restrictions on the ability to use the cents per mile rule in the regulations, and the regulations generally apply a consistency requirement on the method used—taxpayers can’t switch from the lease valuation method to the cents-per-mile method and back from year to year.

Relief

Section III of the Notice contains the relief provision, granting relief from the consistency rules found at Reg. §§1.61-27(d)(7) and 1.61-21(e)(5).  The relief provides:

Accordingly, an employer using the automobile lease valuation rule for the 2020 calendar year may instead use the vehicle cents-per-mile valuation rule beginning on March 13, 2020, notwithstanding the consistency rules in section 1.61-21(d)(7), if, at the beginning of the 2020 calendar year, the employer reasonably expected that an automobile with a fair market value not exceeding $50,400 would be regularly used in the employer’s trade or business throughout the year, but due to the COVID-19 pandemic the automobile was not regularly used in the employer’s trade or business throughout the year.[5]

Note that while the IRS has waived the consistency requirement, the fair market value of the vehicle limit still remains in place—so employees provided with a vehicle with fair market value in excess of $50,400 will still need to have their personal use valued under the standard lease valuation method.

The relief is also not for the entirety of 2020—rather the cents-per-mile rule can only be used beginning on March 13, 2020, the date that the National Emergency began.  The Notice provides:

For this purpose, the COVID-19 pandemic is considered to have commenced on March 13, 2020, the date of the President’s emergency declaration. Therefore, employers that choose to switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule in the 2020 calendar year must prorate the value of the vehicle using the automobile lease valuation rule for January 1, 2020, through March 12, 2020. Employers should multiply the applicable Annual Lease Value by a fraction, the numerator of which is the number of days during the period beginning on January 1, 2020, and ending on March 12, 2020 (72 days), and the denominator of which is 365.[6]

The choice by the employer to switch to the cents-per-mile rule is also binding on the employee (that is, the employee can’t argue for an alternative value using the standard lease valuation rule).[7]

The IRS continues noting the options the employer will have for 2021:

Further, notwithstanding the consistency rules in section 1.61-21(e)(5), employers that choose to switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule during 2020 may revert to the automobile lease valuation rule for 2021, provided they meet the requirements of section 1.61-21(d), other than the consistency rules in section 1.61-21(d)(7). Alternatively, employers that choose to switch to the vehicle cents-per-mile valuation rule during 2020 may continue using that rule for 2021, provided they meet the requirements of section 1.61-21(e), other than the consistency rules in section 1.61-21(e)(5). Employees that use one of the special valuation rules for vehicles must use the same special valuation rule for vehicles that is used by their employer.[8]

Note, though, that if an employer wishes to return to the lease valuation rule, the employer must do so for 2021—otherwise the continued use of the cents-per-mile rule will be mandated.

The consistency rules in section 1.61-21(e)(5) will apply as of January 1, 2021, as if January 1, 2021, were the first day the vehicle was used by the employee for personal use, and the consistency rules in section 1.61-21(d)(7) will apply as of January 1, 2021, as if January 1, 2021, were the first day the vehicle was made available to the employee for personal use. Accordingly, the special valuation rule used for 2021 must continue to be used by the employer and the employee for all subsequent years, except to the extent the employer uses the commuting valuation rule.[9]

Employers are directed to the following methods they can use to implement this change in method for 2020:

Employers that originally used the automobile lease valuation rule to calculate the value of the personal use of an employer-provided automobile during 2020 and that want to instead begin using the vehicle cents-per-mile valuation rule during 2020 based on the relief provided in this notice may use the rules in Announcement 85-113 for reporting and withholding on taxable noncash fringe benefits, or the adjustment process under section 6413 or the refund claim process under section 6402 to correct any overpayment of federal employment taxes on these benefits (for information on these adjustment and refund claim processes, see the regulations under these sections, Rev. Rul. 2009-39, 2009-52 I.R.B. 951, section 13 of Publication 15 (Circular E), Employer’s Tax Guide, and the Instructions for Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund).[10]

[1] Notice 2021-7, January 4, 2021, https://www.irs.gov/pub/irs-drop/n-21-07.pdf (retrieved January 4, 2021)

[2] Notice 2021-7, I. PURPOSE

[3] Notice 2021-7, II. BACKGROUND

[4] Notice 2021-7, II. BACKGROUND

[5] Notice 2021-7, SECTION III. GRANT OF RELIEF

[6] Notice 2021-7, SECTION III. GRANT OF RELIEF

[7] Notice 2021-7, SECTION III. GRANT OF RELIEF

[8] Notice 2021-7, SECTION III. GRANT OF RELIEF

[9] Notice 2021-7, SECTION III. GRANT OF RELIEF

[10] Notice 2021-7, SECTION III. GRANT OF RELIEF