Notice 2021-7: Temporary relief to value personal use of employer-provided automobile (COVID-19)

Personal use of employer-provided automobile

The IRS today released an advance version of Notice 2021-7 to provide temporary relief for employers using the automobile lease valuation rule to value an employee’s personal use of an employer-provided automobile for purposes of income inclusion, employment tax, and reporting.

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The temporary relief is in response to the coronavirus (COVID-19) pandemic.

Notice 2021-7 [PDF 97 KB] provides that if certain requirements are satisfied, employers and employees that are using the automobile lease valuation rule to determine the value of an employee’s personal use of an employer-provided automobile can 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.

The notice provides that 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.

Notice 2021-7

Today’s notice provides relief from the consistency rules in Reg. sections 1.61-21(d)(7) and 1.61-21(e)(5).

Notice 2021-7 provides that 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 Reg. 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.

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 are directed to 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.
  • As of March 13, 2020, employers may begin using the vehicle-cents-per-mile valuation rule.
  • Employees using the automobile lease valuation rule and those employers that switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule must also switch to the vehicle cents-per-mile valuation rule.
  • Notwithstanding the consistency rules in Reg. 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 Reg. 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 Reg. section 1.61-21(e), other than the consistency rules in Reg. 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.
  • The consistency rules in Reg. 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 Reg. 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.
  • 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.
  • 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 by Notice 2021-7 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.

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