NOTE: This headliner is current through the publication date. Since changes may have occurred, no guarantees are made concerning the technical accuracy after the publication date.
Headliner Volume 246
September 23, 2008
The IRS has received many questions about the taxability of the personal use of employer provided automobiles and the Classification Settlement Program. The following provides general guidance for each of these issues.
Personal Use of Employer Provided Vehicles
One of the most common fringe benefits provided to employees is use of a company owned or leased vehicle. The personal use of an employer provided vehicle is a fringe benefit and, generally, fringe benefits are taxable unless specifically excluded by law. As such, taxable fringe benefits are subject to employment taxes and are includible in the employee’s Form W-2, Wage and Tax Statement. There are special rules to withhold, deposit and report the employment taxes on these benefits.
If an employer provides a vehicle for an employee’s use, the amount excludable as a working condition fringe is the amount that would be allowable as a deductible business expense if the employee paid for its use. Employees must substantiate their business use through adequate documentation to qualify as an excludable working condition fringe.
The general way to determine the value of a fringe benefit is to determine the fair market value of that benefit. The fair market value is the price an employee would incur to buy or lease the benefit in an arm’s length transaction. There are special valuation rules an employer can use to determine the value of an employer provided vehicle:
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The Vehicle Cents-Per-Miles Rule - The employer multiplies the miles the employee drove for personal use by the standard rate,
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The Commuting Valuation Rule - The employer multiplies the number of times the employee used the vehicle for commuting times $1.50 if the employer meets all the requirements for using this method, or
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The Automobile Lease Value Rule - The employer uses the annual lease value to determine the value of the employee’s personal use of the vehicle.
There are specific requirements that must be met to use these special valuation rules. For example, the employer must provide the employee with a vehicle for commuting for bona fide non compensatory business reasons to use the commuting valuation rule.
Information on the taxation of automobiles, the automobile valuation rules and the treatment of fringe benefits in general is in Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
Classification Settlement Program (CSP)
Under the CSP, IRS examiners are able to offer businesses under examination for a worker classification issue (independent contractor vs. employee) a settlement using a standard closing agreement tailored to the business. Under the provisions of the CSP, the business is assessed less tax than it otherwise would, provided the business prospectively treats all the subject workers as employees for all future federal employment tax purposes.
The CSP is not available for issues other than worker classification. In addition, the program is only available to taxpayers who timely file Forms 1099. Thus, if the taxpayer did not timely file required Forms 1099; the CSP is not available even if other forms were timely filed.
These agreements help the IRS and employers save time and resources as opposed to going to Appeals or court to conclude their case. CSP procedures also ensure that the taxpayer relief provisions under section 530 of the Revenue Act of 1978 are properly applied.
The CSP is open only to businesses that are under examination by the IRS for a worker classification issue and can include the following types of cases:
There are also several types of cases that do not qualify for CSP. These types of cases, CSP procedures and more information about CSP are in Internal Revenue Manual 4.23.6, Classification Settlement Program.
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