Tax Rules On Auto, Entertainment, And Travel

They must apportion their expense between business travel and personal travel.

1. The standard mileage rate deduction for business miles driven.
2. A proration of actual expenses and depreciation based on the percentage of business use to total use.

• If the taxpayer’s car is used in a nonprofit carpool, the payments from the passengers are considered reimbursements of expenses and are not included in income.
• If the taxpayer operates a carpool for profit, they must include these payments in income and can deduct expenses.

Up to $10,000($5,000 for a married taxpayer filing a separate return).

Such taxes are part of the car’s basis and must be recovered through depreciation.

Actual cost method.

A car means any four-wheeled vehicle that is manufactured primarily for use on public streets, roads, and highways and that has an unloaded gross vehicle weight of 6,000 pounds or less or, a gross vehicle weight of 6,000 pounds or less for a truck or van.

• An ambulance, hearse, or combination ambulance-hearse is used directly in a business.
• A vehicle is used directly in the business of transporting persons or property for compensation or hire.
• Certain commuter highway vehicles (defined in §46(c)(6)(B)) were placed in service before 1986.

Costs.

Note: Cost includes sales and luxury taxes, destination charges, and dealer preparation.

• For 2018 and later, the §1031 nonrecognition treatment of prior law is no longer permitted and any gain on the original car is taxable on the trade-in.
• The trade-in becomes a sale of business property to be reported on Form 4797.
• Gain attributable to depreciation would be taxed as ordinary income.
• A loss on the trade-in of a 100% business use car should be deductible against business income.

The basis is the lesser of the fair market value or the car’s adjusted basis on the date of conversion.

The modified cost recovery system (MACRS).

5-year property.

The car depreciates over its class life instead of the recovery period.

Note: Once a taxpayer makes this choice, they can’t revoke it.

It applies to all property in that class that is placed in service in the year of the election.

Note: Once made, the taxpayer cannot revoke this election. Under this method, the salvage value is zero.

The half-year depreciation convention.

The taxpayers are allowed a half year of depreciation, regardless of what month they actually first use the property.

They are allowed a reduced deduction for the year of disposition.

Note: A half-year of depreciation is allowed in the year of disposition if the property is disposed of before the end of the recovery period.

1. They place property, including cars, in service during the last 3 months of their tax year, and
2. The total basis of these assets is more than 40% of the total basis of all property placed in service during the entire year.

The mid-quarter convention.

It may not be more than the lesser of:

$10,200 ($18,200, if first-year bonus depreciation is used) or 20% for the first tax year of the recovery period,

$16,400 or 32% for the second year,

$9,800 or 19.2% for the third year,

$5,860 or 11.52% for the fourth year,

$5,860 or 11.52% for the fifth year, and

$5,860 or 5.76% for the sixth year (§280F(a)(2)(A) & R.P. 2021-31).

The limits are reduced only by the percentage of personal use.

a). cars with an unloaded gross vehicle weight of more than 6,000 pounds; and

b). SUVs, trucks, and vans with a gross vehicle weight rating of more than 6,000 pounds.

Section 179.

In the year the car is purchased and placed in service.

The year when the car is first used for any purpose.

$10,200 in the first tax year.

The expenses are miscellaneous itemized deductions, subject to the 2% AGI limited of Section 67, and may not be claimed from 2018 through 2025.

The taxpayer must either:

1. the original return filed for the tax year the property was placed in service (whether or not the return was filed on time), or
2. an amended return filed within the time prescribed by law for the applicable tax year (§179(c)).

The taxpayer must use their car more than 50% for business or work in the year they acquired it.

They have to include in income in that later year any excess depreciation.

Note: Any §179 deductions claimed on the car are included in calculating the excess depreciation.

1. A vehicle is designed for more than nine individuals in seating rearward of the driver’s seat;
2. A vehicle is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or
3. It has an integral enclosure, fully enclosing the driver compartment and load-carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

It is any use in trade or business under (§280F(d)(6)(b).

Note: A qualified business use does not include the use of property held merely for the production of income (i.e., investment use).

• It is directly connected with the taxpayer’s business,
• It is properly reported by the taxpayer as income to the other person and, if required, the taxpayer withholding tax on the income, or
• Results in a payment of fair market rent (Reg §1.280F-6T(d)(3)(iv)).

• Leasing property to any 5% owner of the taxpayer or to any person related to the taxpayer,
• The use of the listed property as compensation for services by a 5% owner or a related person, or
• The use of the listed property as compensation for services by any person other than a 5% owner or a related person, unless the provider of the property includes the value of the compensation in the recipient’s gross income, properly reports it and, where necessary, treats it as wages subject to withholding (§280F(d)(6)(C)).

• Determine the percentage of business use for the period following the change by dividing business miles by total miles driven during that period, and
• Multiply that percentage by a fraction, the numerator (top number) of which is the number of months the car is used for business and the denominator (bottom number) of which is 12.

It is only if the use is for the convenience of the employer and required as a condition of employment.

• The depreciation deduction must be figured using the straight-line percentages over a 5- year recovery period (10% for the 1st and 6th years and 20% for the 2nd through 5th years);
• No §179 expensing deduction is allowed; and
• The investment credit is denied (but ITC was repealed effective 1986 anyway).

Note: Taxpayers must use a car more than 50% for business to qualify for the §179 and MACRS deduction.

ITC recaptures (highly unlikely), Forced straight-line depreciation, and Excess depreciation recapture.

Since the last time taxpayers could take the investment tax credit was in 1985.

The recapture will be included in gross income and added to the car’s adjusted tax basis for the first year in which the car is used 50% or less in qualified business use.

1. It is the excess of the amount of the depreciation deductions allowed (including any §179 deduction) for the car for tax years in which the car was used more than 50% in qualified business use, over
2. The amount of the depreciation deductions that would have been allowable for those years if the car had not been used more than 50% in qualified business use for the year it was placed in service.

Auto leasing.

(1) A depreciation payment, and (2) A finance payment.

1. A hidden depreciation payment,
2. An interest payment (i.e., a finance payment like on a lease), and
3. An equity payment.

The price the dealer agrees to lease a vehicle plus any other items and services provided under the lease.

The total of the cash down, dealer or manufacturer rebates, or any net allowance received from a trade-in that is used to reduce the capitalized cost.

In a closed-end lease, the lessor bears the lease-end market valuation risk, whereas, in an open-end lease, the lessee shares in the responsibility for the vehicle’s worth at the lease-end.

Residual value.

Monthly Payment = Depreciation Fee + Lease Fee.

Depreciation Fee = (Cap Cost – Cap Cost Reduction – Residual) / Lease Term

Lease Fee = (Cap Cost – Cap Cost Reduction + Residual) x Money Factor.

Any advance payments must be spread over the entire lease period.

58.5 cents a mile.

26 cents a mile.

The standard mileage rate cannot be used for expenses paid or incurred: (1) Before 2011, for vehicles used for hire (such as a taxi) or (2) For the operation of a fleet of cars where five or more cars are used at the same time (R.P. 2010-51 & Notice 2010-88).

If a taxpayer claimed a deduction for the car in an earlier year using:

(1) ACRS or MACRS depreciation, (2) A §179 deduction, or (3) Any method of depreciation other than straight-line for the estimated useful life of the car (R.P. 2010-51).

Before 1981.

After 1980.

The straight-line basis.

If a taxpayer did not choose the standard mileage rate in the first year and has used ACRS or MACRS, they may not use a standard mileage rate for that car in any subsequent year.

14 cents for each mile.

Taxpayers can list their auto expenses, or deduct 18 cents (in 2022) for each mile. However, medical expenses must exceed 7.5% (in 2022) of AGI to be deductible.

A working condition fringe benefit is any property or service provided to an employee by an employer, to the extent that the cost of such property or service would have been deductible by the employee as a business expense.

The use is consider personal and the vehicle is considered a taxable fringe benefit, and the value of this benefit must be reported as income by the employee.

The employer is no longer able to deduct these expenses from his or her taxable income.

For 2018 and later, an employer can deduct expenses associated with providing a qualified transportation fringe to an employee only if it is necessary for employee safety.

The value of qualified transportation fringe benefits provided to employees is excludable from the employee’s gross income, up to certain limits, unless the benefits are provided for employee safety.

1. Transportation in a commuter highway vehicle: This applies if the transportation is between the employee’s home and workplace. A commuter highway vehicle is defined as any highway vehicle that seats at least six adults (not including the driver) and is used primarily (at least 80% of the mileage) for transporting employees between their homes and workplace, with at least half of the vehicle seats (excluding the driver’s) occupied by employees.
2. A transit pass: This includes any pass, token, farecard, voucher, or similar item that allows a person to ride mass transit or in a vehicle that seats at least six adults (not including the driver) at no additional charge or at a reduced rate. Mass transit can be publicly or privately operated and includes buses, rail, or ferries.
3. Qualified parking: This refers to parking provided to employees on or near the business premises or on or near the location from which employees commute to work using mass transit, commuter highway vehicles, or carpools. It does not include parking on or near the employee’s residence.
4. Bicycle commuting: Although not detailed in the provided chunks, bicycle commuting was previously included as a qualified transportation fringe under §132(f) before changes in tax law. (Note: Bicycle commuting was excluded as a qualified transportation fringe starting in 2018).

The definition of employee does not include self-employed individuals, such as partners, 2% shareholders in S corporations, sole proprietors, and other independent contractors.

1. $280 per month for combined commuter highway vehicle transportation and transit passes.
2. $280 per month for qualified parking.

When the reimbursement for qualified transportation fringes exceeded the exclusion limits, only the amount in excess of these limits was includible in the employee’s gross income.

This means that the portion of the benefit that exceeded the monthly exclusion limits would be subject to taxation as part of the employee’s income.

The employer.

1. General Hypothetical Valuation Method: This method involves determining the value by referencing the cost to a hypothetical person of leasing the same or a comparable vehicle from a hypothetical third party on the same or comparable terms in the geographic area where the vehicle is available for use.
2. Lease Valuation Method: Under this method, if an employer provides an employee with an auto for an entire calendar year, the automobile’s annual lease value can be used to value the benefit. If the auto is provided for less than a full year, a prorated annual lease value or daily lease value is used.
3. Cents-Per-Mile Method: This method applies a standard mileage rate to the personal miles driven by the employee. The vehicle must meet certain criteria, such as being driven at least 10,000 miles in a year, to qualify for this method.
4. Commuting Valuation Method: This method values the personal use of the vehicle based on a set rate per commute. It is typically used when the vehicle is provided primarily for commuting purposes.

The general hypothetical valuation method is a way to determine the value of a fringe benefit, specifically the personal use of an employer-provided automobile, when none of the special valuation methods are used.

The general hypothetical valuation method is used to determine the value of a fringe benefit, specifically the personal use of an employer-provided automobile, when none of the special valuation methods are used. The characteristics of this method include:

• Hypothetical Leasing Cost: The valuation is determined by referencing the cost to a hypothetical person of leasing the same or a comparable vehicle from a hypothetical third party.
• Comparable Terms: The lease terms should be comparable to those in the geographic area where the vehicle is available for use.
• Geographic Consideration: The valuation takes into account the geographic area in which the vehicle is available, ensuring that local market conditions are reflected in the valuation.

This method provides a way to estimate the value of the benefit based on what it would cost to lease a similar vehicle under similar conditions in the relevant area.

1. Annual Lease Value: The value of the benefit provided by an employer to an employee through the use of an automobile can be determined using the automobile’s annual lease value. This value is based on the fair market value of the car when it is first made available to the employee.
2. Prorated Lease Value: If the automobile is provided for less than an entire calendar year, the value of the benefit can be determined using a prorated annual lease value. This is calculated by multiplying the applicable annual lease value by a fraction, with the number of days of availability as the numerator and 365 as the denominator.
3. Daily Lease Value: For periods of availability of less than 30 days, a daily lease value is used, which is calculated by multiplying the applicable annual lease value by a fraction, using four times the number of days of availability as the numerator and 365 as the denominator.
4. Inclusion in Gross Income: The applicable lease value is included in the employee’s gross income unless excluded by law.
5. Use of Fair Market Value: The fair market value of the automobile is used to determine the annual lease value from a table, which includes the value of maintenance and insurance for the automobile.

1. Adoption Timing: The employer must adopt the lease valuation rule by the first day the automobile is made available to an employee for personal use.
2. Consistency in Use: The employer must use the rule for all later years in which the automobile is made available to any employee. However, for any year during which the use of the automobile qualifies, the employer can use the commuting valuation rule.
3. Replacement Vehicles: The employer must continue to use the rule if a replacement automobile is provided to the employee and the primary reason for the replacement is to reduce federal taxes.

1. Find the Fair Market Value (FMV): Determine the fair market value of the car when it was first made available to the employee for personal use.
2. Locate the FMV in the Table: Use the FMV to find the corresponding annual lease value in the table provided in the regulations.
3. Determine the Annual Lease Value: The annual lease value is based on the FMV of the automobile and is found in the table, which includes the value of maintenance and insurance for the automobile.
4. Calculate the Personal Use Value: Multiply the annual lease value by the ratio of personal miles to total miles driven by the employee.
5. Include in Gross Income: The applicable lease value is included in the employee’s gross income unless excluded by law.

0.25 (Auto Fair Market Value) + $500

The fair market value (FMV) used to determine the annual lease value of an automobile is the amount a person would pay a third party in the area where the vehicle is purchased or leased to acquire the particular automobile provided. This amount includes sales tax and title fees.

The safe-harbor value for a leased automobile can be determined using one of the following methods:

1. The manufacturer’s invoice price (including options) plus 4%.
2. The manufacturer’s suggested retail price less 8% (including sales tax, title, and other expenses of purchase).
3. The retail value of the automobile reported by a nationally recognized pricing source.

• Fair Market Value of Maintenance and Insurance: The annual lease values in the table include the fair market value of maintenance and insurance for the automobile.
• Exclusion of Fuel: The annual lease values do not include the fair market value of fuel provided to employees for personal use, regardless of whether the employer provides it, reimburses its cost, or has it charged to the employer.
• Additional Services: The fair market value of any service (other than maintenance and insurance for an automobile) provided is added to the annual lease value of the automobile in determining the fair market value of the benefit provided.

1. Fair Market Value (FMV): The employer can value the fuel provided to employees for personal use at its fair market value.
2. Cents-Per-Mile Rate: The employer can use a rate of 5.5 cents per mile for all miles driven by the employee. However, this rate cannot be used for miles driven outside the United States, its possessions and territories, Canada, and Mexico.
3. Reimbursement or Charge Amount: If the employer reimburses an employee for the cost of fuel or has it charged to the employer, the fuel is valued at the amount of reimbursement or the amount charged to the employer if it was purchased at arm’s length.

1. Calculation Method: The prorated annual lease value is calculated by multiplying the applicable annual lease value by a fraction, where the number of days the automobile is available is the numerator, and 365 is the denominator.
2. Continuous Availability: It is used when an automobile is provided to an employee for continuous periods of 30 or more days but less than an entire calendar year.
3. Exclusion of Unavailability: Periods when the automobile is unavailable to the employee due to personal reasons (e.g., vacation) cannot be considered when calculating the prorated annual lease value.
4. Tax Considerations: A prorated annual lease value cannot be used if the primary reason for the automobile’s unavailability is to reduce federal taxes.

1. Period of Availability:
   • Prorated Annual Lease Value: This is used when an automobile is provided to an employee for continuous periods of 30 or more days but less than an entire calendar year.
   • Daily Lease Value: This is used when an automobile is provided for continuous periods of less than 30 days.
2. Calculation Method:
   • Prorated Annual Lease Value: It is calculated by multiplying the applicable annual lease value by a fraction, where the number of days the automobile is available is the numerator, and 365 is the denominator.
   • Daily Lease Value: It is calculated by multiplying the applicable annual lease value by a fraction, where four times the number of days of availability is the numerator, and 365 is the denominator.
3. Application:
   • Prorated Annual Lease Value: It cannot be used if the primary reason for the automobile’s unavailability is to reduce federal taxes.

The fleet-average valuation rule (FAVR) is an optional component of the automobile lease valuation rule. It allows an employer with a fleet of 20 or more automobiles to use a fleet-average value for purposes of calculating the annual lease value of the automobiles in the employer’s fleet. The fleet-average value is the average of the fair market values of all the automobiles in the fleet.

1. Inclusion of Maintenance and Insurance: The cents-per-mile rate includes the fair market value (FMV) of maintenance and insurance for the vehicle.
2. Fuel Provision: For miles driven in the United States, its territories and possessions, Canada, and Mexico, the rate includes the FMV of fuel provided by the employer. If the employer does not provide fuel, the rate can be reduced by no more than 5.5 cents.
3. Exclusion of Fuel for International Miles: For miles driven outside the United States, Canada, and Mexico, the FMV of fuel provided is not reflected in the cents-per-mile rate, allowing the employer to reduce the rate by no more than 5.5 cents.
4. Adoption Timing: An employer must adopt the cents-per-mile rule by the first day the vehicle is used by an employee for personal use.
5. Maximum Vehicle Value: The maximum value of an employer-provided vehicle for use under the vehicle cents-per-mile method was $56,100 in 20222.
6. Application to Personal Miles: The standard mileage rate is applied only to personal miles, and business miles are disregarded.

The purpose of the cents-per-mile method is to provide a simplified way for employers to determine the value of an employee’s personal use of an employer-provided vehicle. This method allows the employer to calculate the value by multiplying the standard mileage rate by the total number of personal miles driven by the employee. The cents-per-mile rate includes the fair market value (FMV) of maintenance and insurance for the vehicle, and for miles driven in the United States, its territories and possessions, Canada, and Mexico, it also includes the FMV of fuel provided by the employer. This method is particularly useful for vehicles that are reasonably expected to be regularly used in a trade or business throughout the calendar year.

To consider a vehicle as being regularly used under the cents-per-mile method, it must meet one of the following conditions:

1. At least 50% of the vehicle’s total annual mileage is for the employer’s trade or business.
2. The vehicle is generally used each workday to drive at least three employees to and from work in an employer-sponsored commuting pool.

Infrequent business use of the vehicle, such as for occasional trips to the airport or between multiple business premises, does not constitute regular use of the vehicle in a trade or business.

The mileage rule under the cents-per-mile method allows the use of this valuation method even if a vehicle is not expected to be used regularly in a trade or business, provided it meets certain criteria.

To meet the mileage rule for the cents-per-mile method, a vehicle must satisfy the following requirements:

1. The vehicle must be actually driven at least 10,000 miles in the calendar year.
2. The vehicle must be used primarily by employees during the year.

To use the commuting value method, an employer must meet the following requirements:

1. Ownership or Lease: The employer must own or lease the vehicle and provide it to one or more employees for use in a trade or business.
2. Commuting Requirement: The employer requires the employee to commute to and/or from work in the vehicle for bona fide noncompensatory business reasons.
3. Written Policy: The employer must establish a written policy under which the employee is not allowed to use the vehicle for personal purposes, other than for commuting or de minimis personal use (such as a stop for a personal errand on the way between a business delivery and the employee’s home).
4. Limited Personal Use: Except for de minimis personal use, the employee does not use the vehicle for a personal purpose other than commuting.
5. Non-Control Employee: The employee required to use it for commuting must not be a control employee.

The advantages of using the commuting value method include:

1. Simplicity: The commuting value method provides a straightforward way to calculate the taxable value of an employee’s personal use of an employer-provided vehicle. It assigns a fixed value of $1.50 per one-way commute, which simplifies the valuation process.
2. Reduced Administrative Burden: By using a fixed rate for commuting, employers can reduce the administrative burden associated with tracking and calculating the actual value of personal use, as opposed to more complex methods like the annual lease value or cents-per-mile methods.
3. Clear Requirements: The method has clear requirements, such as the need for a written policy that restricts personal use to commuting and de minimis personal use, which helps ensure compliance with tax regulations.
4. Applicability to Non-Control Employees: The method can be used for employees who are not considered control employees, which allows for broader applicability within an organization.

The limitations of using the commuting value method for valuations include:

1. Control Employee Restriction: The commuting value method cannot be used if the employee required to use the vehicle for commuting is a control employee. A control employee is defined as a board- or shareholder-appointed, confirmed, or elected officer of the employer with compensation of $50,000 or more, a director, someone who receives compensation of $100,000 or more, or owns a 1% or more equity, capital, or profits interest in the employer.
2. Written Policy Requirement: The employer must establish a written policy that restricts the use of the vehicle to commuting and de minimis personal use, such as a stop for a personal errand on the way between a business delivery and the employee’s home.
3. Non-Compensatory Business Reasons: The employer must require the employee to commute in the vehicle for bona fide noncompensatory business reasons.
4. Exclusion of Chauffeur-Driven Vehicles: The commuting valuation rule cannot be used for any passenger in a chauffeur-driven vehicle, although it can be used to value the commuting use of the chauffeur.

A control employee of a non-government employer is defined as any employee who:

1. Is a board- or shareholder-appointed, confirmed, or elected officer of the employer and whose compensation is $50,000 (adjusted annually under §415(d)) or more.
2. Is a director of the employer.
3. Receives compensation of $100,000 (adjusted annually under §415(d)) or more from the employer.
4. Owns a 1% or more equity, capital, or profits interest in the employer.

These criteria help determine which employees are considered control employees for the purposes of certain tax and valuation rules.

A control employee of a government employer is defined as any:

1. Elected official, or
2. Employee whose compensation is at least as much as that paid to a federal government employee at Executive Level V.

Classifying employees as control and non-control under the commuting value method is important for several reasons:

1. Eligibility for the Commuting Value Method: The commuting value method can only be used for non-control employees. This method allows employers to value the personal use of an employer-provided vehicle for commuting at a fixed rate of $1.50 per one-way commute. Control employees, such as high-ranking officers or those with significant ownership interest, are not eligible to use this simplified valuation method.
2. Compliance with Tax Regulations: Proper classification ensures compliance with tax regulations. The IRS has specific rules regarding who can use the commuting value method, and misclassification could lead to incorrect tax reporting and potential penalties.
3. Simplified Valuation Process: For non-control employees, using the commuting value method simplifies the process of calculating the taxable value of personal use of a vehicle. This reduces administrative burden and ensures consistent application of the valuation method.

Employer-provided transportation refers to local transportation services that an employer provides to an employee for commuting purposes.

Section 1.132-6(d)(2)(iii) of the regulations provides that if an employer provides transportation (such as taxi fare) to an employee for use in commuting to, from, or both to and from work because of unusual circumstances and because, based on the facts and circumstances, it is unsafe for the employee to use other available means of transportation, the excess of the value of each one-way trip over $1.50 per one-way commute is excluded from gross income.

To qualify for the $1.50 per one-way commute exclusion from gross income under Section 1.132-6(d)(2)(iii), the following requirements must be met:

1. Employer-Provided Transportation: The transportation must be provided by the employer, which can include transportation by a vehicle bought by the employer or reimbursement to the employee for transportation costs, such as hiring a cab.
2. Unusual and Unsafe Circumstances: The transportation is provided because of unusual circumstances and because it is unsafe for the employee to use other available means of transportation.
3. Qualified Employee: The employee must be a qualified employee, which generally means they perform services during the current year, are paid on an hourly basis, and meet other specific criteria.
4. No Personal Use: The employee does not use the transportation for personal purposes other than commuting due to unsafe conditions.
5. Written Policy: The employer must have a written policy stating that the transportation is not provided for personal purposes other than commuting because of unsafe conditions, and the employer’s practice must follow this policy.

A qualified employee is defined as one who:

1. Performs services during the current year.
2. Is paid on an hourly basis.
3. Is not claimed under §213(a)(1) of the Fair Labor Standards Act of 1938 (as amended) to be exempt from the minimum wage and maximum hour provisions.
4. Is within a classification for which the employer actually pays, or has specified in writing it will pay, compensation for overtime equal to or exceeding one and one-half times the regular rate provided in §207 of the 1938 Act.
5. Does not receive compensation in excess of the amount permitted by §414(q)(1)(C) from the employer.

Qualified nonpersonal use vehicles are vehicles that are not likely to be used more than minimally for personal purposes due to their design.

Examples include:

1. Clearly marked police and fire vehicles.
2. Unmarked vehicles used by law enforcement officers if the use is officially authorized.
3. Ambulances used as such.
4. Hearses used as such.
5. Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
6. Delivery trucks with seating for the driver only, or for the driver plus a folding jump seat.
7. Passenger buses used as such with a capacity of at least 20 passengers.
8. School buses.
9. Tractors and other special purpose farm vehicles.

A pickup truck or van can be considered a qualified nonpersonal use vehicle if it meets certain guidelines that make it unlikely to be used more than minimally for personal purposes.

A pickup truck can qualify as a qualified nonpersonal use vehicle if it meets the following criteria:

1. Weight and Marking: The pickup truck must have a loaded gross vehicle weight not over 14,000 pounds and be clearly marked with permanently affixed decals or with special painting or other advertising associated with the employer’s trade, business, or function.
2. Equipment or Use: The truck must either be:
   • Equipped with at least one of the following:
     • A hydraulic liftgate,
     • Permanently installed tanks or drums,
     • Permanently installed sideboards or panels that materially raise the level of the sides of the truck bed, or
     • Other heavy equipment (such as an electric generator, welder, boom, or crane used to tow automobiles and other vehicles).
   • Or, it must be actually used primarily for transporting a particular type of load (other than over the public highways) in connection with a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation for which it has been specially designed or modified to a significant degree.

A van can qualify as a qualified nonpersonal use vehicle if it meets the following criteria:

1. Weight and Marking: The van must have a loaded gross vehicle weight not over 14,000 pounds and be clearly marked with permanently affixed decals or with special painting or other advertising associated with the employer’s trade, business, or function.
2. Seating and Cargo: The van must have a seat for the driver only or for the driver and one other person.
3. Cargo Area: The van must either have:
   • Permanent shelving installed that fills most of the cargo area, or
   • An open cargo area that constantly (during both working and non-working hours) carries merchandise, material, or equipment used in the employer’s trade, business, or function.

A qualified automobile demonstration use is a working condition fringe for a full-time automobile salesperson and is therefore excluded from their income. It refers to the use of a demonstration automobile in the dealer’s sales area under specific conditions:

1. The automobile is provided mainly so the salesperson can better perform services for their employer.
2. There are substantial restrictions on the salesperson’s personal use of the automobile.

A demonstration automobile is an automobile that is currently in the automobile dealer’s inventory and is available for test drives by customers during normal business hours.

The sales area for a full-time automobile salesperson is defined as the geographic area around the dealer’s office from which the office regularly gets customers.

For a particular full-time salesperson, the sales area is the larger of:

1. The area within a 75-mile radius of the sales office, or
2. The one-way commuting distance for that salesperson.

A full-time automobile salesperson is defined as someone who is employed by an automobile dealer and meets the following criteria:

1. Customarily spends at least half of a normal business day performing the functions of a floor salesperson or sales manager.
2. Directly engages in substantial promotion and negotiation of sales to customers.
3. Customarily works a number of hours considered full-time in the industry, which is at least 1,000 hours per year.
4. Earns at least 25% of their gross income from the dealership directly as a result of the activities mentioned above.

The value of the use of a demonstration automobile by anyone other than a full-time automobile salesperson, such as a mechanic or part-time salesman, is not excludable from income.

1. Use by anyone other than full-time salespersons (such as use by members of family) is prohibited.
2. Use for personal vacation trips is prohibited.
3. Storage of personal possessions in the automobile is prohibited.
4. Use outside of normal working hours is limited to a certain number of miles.

1. Form W-2 Reporting: The employer must report the total of the taxable fringe benefits paid or treated as paid to an employee during the year and the tax withheld for these benefits on Form W-2, Wage and Tax Statement. These amounts can be shown either on the Form W-2 for regular pay or on a separate Form W-2.
2. Separate Statement: If the employer provided the employee with a car, truck, or other motor vehicle and chose to treat all of the employee’s use of it as personal, its value must be either separately shown on Form W-2 or reported to the employee on a separate statement.
3. Election Not to Withhold for Income Taxes: The employer can elect not to withhold income tax on the value of the employee’s personal use of an employer-provided vehicle. However, the employer must withhold employment taxes (such as social security). The employer must give the employee written notification of an election not to withhold by the later of January 31 of the year for which the election applies or within 30 days after the date the employer first provides the vehicle to the employee.
4. Value Reporting: The employer can figure and report either:
   • The actual value of the employee’s personal use of the vehicle, or
   • The value of the vehicle as if the employee used it entirely for personal purposes (100% income inclusion). Note that the 100% income inclusion method cannot be used if the value of the use of the vehicle is determined under the vehicle cents-per-mile or commuting valuation special methods.

The options for an employer to report an employee’s taxable use of an employer-provided vehicle in terms of accounting period are as follows:

1. The General Rule: This involves valuing the use of the vehicle for a full calendar year, from January 1 to December 31.
2. The Special Accounting Period Rule: This allows the employer to treat the value of the use provided during the last two months of the calendar year (or any shorter period) as paid during the following calendar year. This means that each year, the employer includes the value of benefits provided for the last two months of the prior year and the first ten months of the current year.

If the employer elects the special accounting rule, employees must also use it, and the employer must notify employees of this election and the period involved.