January 6, 2021

New Relief: Personal Use of an Employer-Provided Automobile

By Michael D’Addio, Principal, Tax & Business Services

New Relief: Personal Use of an Employer-Provided Automobile Tax Advisory Services

This week the IRS issued Notice 2021-7, which provides additional guidance to employers and employees who have been using the Lease Valuation Method for valuing the employee’s personal use of an employer-provided automobile. The Notice provides for the option to change to the Cents-Per-Mile Method for part of 2020. This change could result in a reduction in taxable income allocated to the employee and a reduction in the related payroll taxes for both sides.


Under Internal Revenue Code Section (IRC) 61, an employee must include in gross income the amount by which the fair market value of a fringe benefit exceeds:

  1. The amount paid for the benefit by the recipient; and
  2. Any amount specifically excluded from gross income by any provision.

This rule applies to the personal use of an employer-provided automobile.

For most employers, the value of an employee’s personal use of an automobile can be determined under the lease valuation rule or, alternatively, under the Cents-Per-Mile Method where certain conditions are satisfied. Whichever rule is initially selected, IRS regulations contain a “consistency rule” which requires that the employer and employee must generally use the same valuation method consistently from year-to-year.

Under the Lease Valuation Method, the annual value of the use of the auto is determined from an IRS table and is based on the value of the automobile. This value is set for a four-year period of employee use. The value so determined is then allocated to the employee’s personal use based on the ratio of the employee’s personal use miles to the total miles the auto was used during the year. There is an additional charge where the employer pays for fuel for the personal use by the employee.

Under the Cents-Per-Mile Method, the value of the personal use is determined by multiplying the IRS standard mileage rate (57.5 cents for 2020) by the total of the miles used for personal purposes – i.e., all miles for which the employee has used the automobile except for miles driven in the trade or business of being an employee of the employer. However, this method cannot be used for vehicles with a value of $50,000, as adjusted annually for inflation under IRC Section 280F(d)(7) ($50,400 for 2020).

Pandemic Relief

Due to the pandemic, more employees have been working remotely, and there generally has been less business travel. In many circumstances, this causes the ratio of personal use miles to total miles to be significantly higher than in prior years, producing additional income to be allocated to the employee. The Cents-Per-Mile Method could produce lesser income to the employee, but a change would normally be barred under the consistency rule.

The new IRS Notice provides relief from the consistency rules. For an employer using the Lease Inclusion Method prior to March 13, 2020, the IRS will permit a change to the Cents-Per-Mile Method for a vehicle with a fair market value of $50,400 or less. The Notice provides that the employer must have expected the auto to be regularly used in its trade or business throughout the year, but due to the pandemic it was not so used.

This relief is limited to the period beginning on March 13, 2020, through the end of the year. For the period prior to that date, the Annual Lease Value Method must still be used. The annual lease value for the period January 1, 2020, to March 12, 2020 (72 days), will be prorated to that period based on the number of days in the lease period over 365.

An employer that changes to the Cents-Per-Mile Method for 2020 will not be required to use this method in 2021. It will be able to use the Lease Inclusion Method as if January 1, 2021, were the first day of personal use of the automobile by the employee. The Notice also gives the employer the option of continuing to use the Cent-Per-Mile Method in 2021 if all requirements for that method are satisfied.

If you have any questions on this guidance, please reach out to your Marcum tax professional for assistance.

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