Due to the COVID-19 pandemic, certain employers and employees who use the automobile lease valuation rule to determine the value of an employee’s personal use of an employer-provided automobile may switch to the vehicle cents-per-mile method.

Background

Under the general rule, an employer who provides an employee a vehicle must adopt one of the following methods to determine the value of an employee’s personal use of the vehicle: the automobile lease valuation rule, or the vehicle cents-per-mile valuation rule. (In certain cases, a third method, the commuting valuation rule, may be used.)

The employer and the employee must use the chosen valuation method consistently (that is, in each subsequent year), except that the employer and the employee may use the commuting valuation rule if its requirements are satisfied.

As a result of the pandemic, many employers suspended business operations or implemented telework arrangements for employees, thus reducing business and personal use of employer-provided automobiles, This has increased the lease value to be included in an employee’s income for 2020 compared to prior years. In contrast, the vehicle cents-per-mile valuation rule includes in income only the value that relates to actual personal use, providing a more accurate reflection of the employee’s income in these circumstances.

Switch to Cents-per-Mile

Due to the suddenness and unexpected onset of the COVID-19 pandemic, the IRS is allowing an employer that uses the automobile lease valuation rule for the 2020 calendar year to instead use the vehicle cents-per-mile valuation rule beginning on March 13, 2020, if:

  • at the beginning of 2020, 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; and
  • due to the COVID-19 pandemic, the automobile was not regularly used in the employer’s trade or business throughout the year.

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 that switch to the vehicle cents-per-mile valuation rule during 2020 generally may:

  • revert to the automobile lease valuation rule for 2021; or
  • continue using vehicle cents-per-mile valuation rule for 2021.

In either case, the special valuation rule used in 2021 must be used for all subsequent years.

Employees must use the same special valuation rule used by their employer.