The Internal Revenue Service issued regulations clarifying the circumstances in which non-cash fringe benefits provided to employees must be treated as taxable income

Ellis, Richard M.

English

University of Tennessee, Knoxville: Trace

University of Tennessee, Knoxville Trace: Tennessee Research and Creative Exchange MTAS Publications: Technical Bulletins Municipal Technical Advisory Service (MTAS) 11-26-1985 Technical Bulletins: IRS Regulations Clarifying Taxation of Non-Cash Fringe Benefits Richard M. Ellis Municipal Technical Advisory Service Follow this and additional works at: https://trace.tennessee.edu/utk_mtastech  Part of the Public Administration Commons The MTAS publications provided on this website are archival documents intended for informational purposes only and should not be considered as authoritative. The content contained in these publications may be outdated, and the laws referenced therein may have changed or may not be applicable to your city or circumstances. For current information, please visit the MTAS website at: mtas.tennessee.edu. Recommended Citation Ellis, Richard M., "Technical Bulletins: IRS Regulations Clarifying Taxation of Non-Cash Fringe Benefits" (1985). MTAS Publications: Technical Bulletins. https://trace.tennessee.edu/utk_mtastech/209 This Bulletin is brought to you for free and open access by the Municipal Technical Advisory Service (MTAS) at Trace: Tennessee Research and Creative Exchange. It has been accepted for inclusion in MTAS Publications: Technical Bulletins by an authorized administrator of Trace: Tennessee Research and Creative Exchange. For more information, please contact trace@utk.edu. • • MUNICll'AL TECHNICAL ADVISORY SERVICE THE UNIVERSITY OF TENNESSEE IN COOPERATION WITH THE TENNESSEE MUNICIPAL LEAGUE AuthOrtutlon, Number e1 .. 1Q50-00-00349 N<;>vember 2 6, 1 985 IRS REGULATIONS CLARIFYING TAXATION OF .'NON--OASH FRINGE BENEFITS By: Richard M. Ellis, MTAS Municipal Management Consultant The Internal Revenue Service finally has issued regulations clarifying the circumstances in which non-cash fringe benefits provided to employees must be treated as taxable income. · The regulations, intended to implement P. L. 99-44 passed by Congress in May 1985, establish temporary rules on record�keeping and the tax treatment of vehicles provided by cities to their employees. Except for certain narrowly defined exceptions, employers are required to withhold income and social security taxes on the income which is attributed to the employee as a fringe benefit for the use of a city-provided vehicle, effective January 1, 1985 • For the administrative convenience of employers, a special accounting rule is available as an alternative to the general withholding rule. Under the special accounting rule, the employer may treat the value of the benefits provided during the last two months of the calendar year, or any shorter period, as paid during the subsequent calendar year. Thus, the employer may treat the value of the benefits provided in the period beginning January 1, 1985, and ending October 31, 1985, as the value of the benefits provided in 1985. For years subsequent to 1985, the value of the benefits actually provided in the last two· months of the previous calendar year is treated as provided in the current calendar year together with the value of the benefits provided in the first 10 months of the current calendar year. Exe!)>t Vehicles Two types of vehicles are def.iried its 'exeinpt ·from taxation under the regulations. If a vehicle provided by ·the City qualifies ·as either. a non..,personal use vehicle or a qualified non-personal use viehicle, the city is not required to withhold any income or social security taxes for •the use of th.e vehicle. A non-personal use vehicle is one which ·the city. does not permit the employee to use for any personal purpose, including comtillting, and' which is kept on city property. Taxes do not need to be withheld on employees who utilize these types of vehicles as long as the city has a written policy prohibiting personal use of such vehicles. This policy of prohibiting personal use need not be in writing to take advantage of the exemption in 1985. However, the city must establish a written policy prohibiting personal use of city-owned vehicles if it wishes to utilize the exemption in subsequent years. ·-- 2 - . ' Certain vehicles are classified as qualified non-personal use vehicles and are automatically considered to be non-taxable. The new regulations exempt • public safety and other special use vehicles from taxation if certain conditions are met. In general, the vehicles covered by this exemption are those not likely to be used to any significant extent for personal purposes, These exempt vehicles include: * Clearly marked police and fire vehicles (the police officer and fire­fighter must be on call at all times if this exemption is to be utilized, and the vehicle must be clearly marked as a police or fire vehicle), * Ambulances and hearses. * Cherry pickers. * Dump trucks and garbage trucks. * Utility trucks (the employee must be required to drive the truck home for the purpose of responding to emergencies involving electricity, gas, telephone, water, sewer, or a steam utility), * School buses. * Other types of buses which have the capacity to bold 20 or more * passengers. Unmarked law enforcement vehicles (the exemption will be lost if any personal use occurs other than uses which are incidental to law enforcement responsibilities, e.g., going to and from home to a stake out site. To qualify as a law enforcement officer under this provision, for unmarked vehicles, the �mployee must have the power of arrest and carry a firearm). Nonexe11!J>t Vehicles The withholding obligations of the IRS Code apply to all other vehicles provided to city employees, The new regulations establish rules for substantiating non-taxable uses which occur in 1986. While written evidence is accorded greater weight, the employee may substantiate non-taxable uses by oral evidence. Non-taxable uses may be substantiated in a number of ways, including account books, diaries, logs, receipts, bills, trip sheets, and expense forms. Sampling techniques may also be used (e.g., the employee may extrapolate his or her non-personal uses for the year from records of non-personal use in an average week). Records should substantiate the time, date, place, purpose, and cost of travel. The new regulations do not establish clear rules for the substantiation of non-taxable uses in 1985, Generally, however, the rules for 1986 should be used as guidelines to determine whether the employee's information is sufficient to classify the use (or portion of the use) of a city-provided vehicle as non­taxable. The city should retain any information provided by the employee to substantiate bis or her claim that the vehicle is non-taxable to the extent of its use for non-personal purposes. • • ., • • - 3 -Special Rule For Comaiting=Uae-<>nly Vehicles The employee may elect to use the simplified $3.00 per round trip rule or the annual lease value rule. The employee may use the $3.00 per day rule only if the vehicle is used solely for commuting purposes. The city must e ither withhold taxes on the basis of $3.00 for each day of co1DJ11Jting use or receive reimbursement from the employee for that amount. The city should obtain from the employee information as to the frequency of commuting use. The employer may rely on a time sheet if the vehicle is used for co1DJ11Jting every work day. If the vehicle is not used every work day (e.g. , only twice a week), then the employee mst provide the employer with information which supports the employee's claim that the vehicle was used for commuting purposes only on a sporadic or limited basis. This special rule may be used for 1985 if the city has a policy (which need not be written) of prohibiting personal use of city­owned vehicles for any reason other than commting, This policy must be in writing in order for the $3.00 rule to work in 1986, As outlined in existing regulations and as amended by the new regulations, the special $3.00 per day rule may not be used to value co1DJ11Jting use of a city­owned vehicle by a "control," or "key, " employee. This type of employee means an elected official or an employee who is appointed by the chief executive officer (Mayor, City Manager, or City Commissioners), such as department heads or assistants to the chief executive officer. These control employees must use the annual lease value method for determining what should b e  included in income as a taxable non-cash fringe benefit. Annual Lease Value For cases in which the $3,00 special rule is not used for co1DJ11Jting-use-only vehicles and for all other nonexempt vehicles, the annual lease value (ALV) rules apply, It should be pointed out that in cases where an employee's co1DJ11Jte is short, the ALV rule is likely to be  more beneficial for the employee than the $3.00 rule. Under the ALV method, the taxable value of the fringe benefit to the employee is determined by subtracting the cost of the business use from the ALV. To calculate the taxable value of a city-owned vehicle under the ALV rule, the following four step process must be followed: (1) The fair market value (FMV) of the vehicle is determined. The FMV is defined as the equivalent of the cost to the employee of purchasing a vehicle similar to the vehicle provided by the employer. A possible source for this information is the NADA Blue Book used by banks and car dealers to value vehicles. The value determined cannot be reduced by taking into account possible cost savings from group, or fleet purchase, discounts. Once the FMV is determined, a table (see below) is used to determine the vehicle's ALV, - 4 -(2) A mileage fraction, representing the percentage of business of the vehicle, is calculated. To determine this 111ileage fraction, busine88 A use miles are determined by subtracting the number of personal use .. miles driven by the employee from the total number of miles. The number of business use miles must then be divided by the total number of miles driven by the employee. (3) The business use of the vehicle is determined by 1J111ltiplying the appropriate ALV for the vehicle by the mileage fraction. (4) The value of the fringe benefit attributable to the personal use of the vehicle which lllUSt be treated as taxable income for the employee is determined by subtracting the vehicle's business use from the ALV. The ALV established by the IRS chart includes maintenance and insurance, but does not include gasoline. If the city pays for gasoline, an additional 5. 5 cents per personal mile also lllUSt be included in the employee's gross income. The IRS has asked city officials specifically to comment as to what types of employees should be prohibited from using the special $3.00 per day commuting rule as "control" employees. If city officials wish to comment on any part of the t emporary regulations issued November 6, 1985, they must submit the comments to the IRS by January 5, 1986. If you have questions or need assistance regarding this matter, contact the M unicipal Management Consultant for your city, or call the MTAS office in Knoxville at (615) 974-5301. Annual lease value table (ll Aot(:9)bile Talr Market Y•l.!19! . . - ''' 11000 - 1,Ht 2,000 - 2,ttt 3,DOU - J,fft t,oeo - t,ttt s,ooo - s,tn t,000 - '·''' 7,000 - '·''' 1,000 - '·''' t,000 - '·''' 10,000 - 10,111 11,000 - 11,111 12,000 - 12,tll 13,000 - 13,ttt lt,000 - lt,ttt 15,000 - 15',ttt 15,0DO - 15,ttl 17,000 - 1.7,tlt 11,000 - 11,ttt 19,000 - lt,ttt :Z0,000 - 2D,ttt 21,000 - 21,191 (2) AnftDtl Let .. Vain $ HO 150 1,110 1,350 i.,oo l,ISG 2,100 2,lSG 2,100 2,150 3,100 3,350 3,600 3,150 4,100 4,350 C,500 C,150 S, 100 5,350 S,500 5,150 Ill Alltmpi>lle Ptlt .. ,,,t Yalae 22,000 - 22,tt• 23,000 - 23,"9 24,000 - 2•,ttt 2s,ooo - :as,ttt 21,DOI - 2l,ttt 21,oeo - it,ttt J0,000 - ll,ttt 12,oot - JJ,ttt 14,000 - JS,ttt ll,001 - 31,ltt 11,000 - ,,,,,, 40,000 - 41,ttt 42,000 - 43,ttt 44,000 - 45,ttt .,,000 - .,,,,, 41,000 - ''·''' 50,000 - 51,ttt 52,000 - 53,999 54,000 - SS,999 56,000 - 51,999 51,000 - 60,000 .(J} annual Le••• JalM 1,100 1,350 '·"° 1,150 7,250 ,,,so 1,250 1,150 t,250 t,750 10,250 10, 750 11,250 ll,750 12,250 12,750 13,250 13,750 lC,250 lC,750 15,250 • • 

Technical Bulletins: IRS Regulations Clarifying Taxation of Non-Cash Fringe Benefits

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Technical Bulletins: IRS Regulations Clarifying Taxation of Non-Cash Fringe Benefits

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University of Tennessee, Knoxville: Trace