This Technical Bulletin discusses temporary regulations issued by the IRS, retroactively effective to January 1, 1985, which affected certain fringe benefits provided to city employees

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) 3-8-1985 Technical Bulletins: Changes in IRS Rules Regarding Employee 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 The content contained in these publications may be outdated, and the laws referenced therein may have changed or may not be applicable to your city or circumstances.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: Changes in IRS Rules Regarding Employee Fringe Benefits" (1985). MTAS Publications: Technical Bulletins. https://trace.tennessee.edu/utk_mtastech/206 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. • • • (Ml'As TECHNICAL BULLETIN) : MUNICIPAL TECHNICAL ADVISORY SERVICE; THE UNIVERSITY OF TENNESSEE g IN COOPERATION WITH THE TENNESSEE MUNICIPAL LEAGUE U.T. El4-1050-00�001-85 ,,; '-·-._ ----- -·- --·�----:·.: -''-'·-. ... .,�.,,...,...__ . 'MQ..11' I '•'·. March 8, 1985'' l CHANGES IN IRS RULES REGARDING EMPLOYEE FRINGE BENEFITV �By Richard M. ;1 � Is, Municipal Programs Consultant The Internal Revenue Service has Issued temporary regulations, retroactively effective to Jan. 1, 1985, which wl I I affect certain fringe benefits provided to city employees. The major Impact on city employees will Involve their use of city-owned vehicles. It should be assumed that these regulations wll I become permanent, although there has been debate In Congress regarding the el lmfnatlon of some of the provisions of the new regulatfons, especially those that would Involve pub I le safety personnel. Many questions regarding exactly how these regulations wf I I be appl fed have not been answered, but It Is anticipated that most of the provisions wll I be adopted, and they wll I have an Impact on cities, as employers, and the city employees who have access to city-owned vehicles on a regular basis. The basis of the new regulations (Section 6 1[a][1] of the Internal Revenue Code) provides that unless specfflcal ly excluded by some other section of the Internal Revenue Code, gross revenue Includes certain non-cash fringe benefits. The recipient of a non-cash fringe benefit must Include In his or her gross Income the amount of the fa Ir market va I ue of the benef It, reduced by the amount, ff any, paid by the recipient for the benefit and further reduced by the amount, If any, specifically excluded by the Internal Revenue Code. Below Is ,a brief explanation of the new regulations, how they are appl led, and the reporting requirements for the city. DETERMINATION OF VALUE The primary Impact on cities wll I be employee use of city-owned vehicles. Other benefits which wll I have an Impact In some cities are city-paid memberships In social or civic clubs, and city employees receiving free tickets to entertainment events. Each of these are fringe benefits which are subject to the new regulations, and the value of them must be Included In an employee's gross Income for purposes of taxation. Below are methods to be utl I I zed In determining the value of these fringe benefits . MTAS Llfl!V\RY NOV "0 1986 IJNIV. OF T!iNN. .:. In the case of a fringe benefit such as a club membership or free tickets, the value of those memberships or tickets represent the amount that must be Included as gross Income for the employee. For the use of a city-owned vehicle, there are two special rules for valuing city-provided vehicles, Annual Lease Value and Dally Lease Value. ANNUAL LEASE VALUE CALV) If a city provides a vehicle to an employee for an entire calendar year, the Annual Lease Value CALV) ls the value of the benefit provided. To calculate the ALV, determine the fair market value of the vehicle as of the date the vehicle Is provided to the employee, or Jan. 1, 1985, whichever comes first. One method for establishing fair market value Is the Information utili zed by banks to determine the value of vehicles for loan value. Whatever method ls used, once fair market value has been established, the proposed rules Include a table which determines the ALV ( see attachment). It should be noted that the ALV Includes an allowance for Insurance and maintenance. IT D OE S  N OT  ALL OW F OR  FUEL. A fair market value of the fuel provided by the employer must be established, or the fuel could be valued at 5.5 cents per mile. This amount for fuel would be Included as gross Income to the employee, along with the ALV, and be subject to taxation. • If a vehicle ls provided to an employee for a period less than a calendar year, but more than 30 successive days, the value of the employer-provided vehicle ls determined by pro-rating the ALV, which ls computed by multiplying • the ALV by a fraction, the numerator of which ls the number of days of continuous avallabll lty and the denominator Is 365. As an example, assume that a vehicle ls utll l zed for 40 continuous days and the ALV ls determined to be $2,000. The computation would be: $2,000 x 40/365 = $220. DAILY LEASE VALUE CDLV) Avallabll lty of a vehicle for a period of less than 30 days requires the use of the Dally Lease Value (DLV) rule Jn determining the value of the benefit to the employee. The DLV equals the ALV multlpl led by a fraction , the numerator of which ls four· times the number of days of avallabll lty and the denominator ls 365. Utl I I zing an ALV of $2,000 and use of the vehicle for 15 days, the computation would be: $2,000 x (4 x 15)/365 = $320. As can be seen, the value of the DLV ls somewhat higher than utlllzlng the ALV method. The rules permit proration based upon a ful I 30 days, even though the employee does not utl I l ze the vehicle for the full 30 days. This wll I al low for a lower value Jn most cases. Once an employee has determined the method of valuation, It cannot be changed as long as that employee ls assigned any vehicle; and, a vehicle cannot be transferred from an amp I oyee for the purpose .of I ow er Ing fader a I taxes. C0"'4UTING VALUE Recogni zing that some vehicles are provided for commuting only, a special rule has been proposed that would establ lsh a benefit value for such a situation. In order to use the special rule to compute the commuting value, al I of these criteria must be met: 2 • ••• • • • 1. For bona tide, non-compensatory business reasons, the employer requires the employee to commute In the vehicle provided. 2. The employer has a strict pol Icy that the vehicle Is not to be utll lzed for personal purposes other than commuting, except that certain exceptions are made for stopping at a grocery, laundry, etc., when going to and from the work place and the home. 3. The vehicle Is utlllzed solely In the employer's business. 4. Except In the case of pol Ice, fire, and emergency medical vehicles, a substantial amount of the use of the vehicle Is by employees other than the employee required to use the vehicle for commuting. 5. The employee required to use the vehicle Is not a "key employee," For city government, a "key employee" may mean a city manager, a department head, and/or a supervisor. It Is unclear who would be considered a "key employee" In city government; this Is a matter which should be resolved by the IRS. If an employee satisfies al I of the above criteria, the commuting value ls computed at $3 per day for each day a vehicle Is utilized for commuting, whether the commute Is one-way or round-trip. This provision relating to commuting would appear to Indicate that pol Ice officers Cother than the chief and other administrative off lcersJ, fire personnel Cother than the chief and other administrative personnel), and certain emergency response personnel ln publ Jc works, would fal I Into this category If they are taking vehlcles home as required by their jobs. WORKING CONDITION FRINGE Recognizing that If an employee was utl I I zing his or her own vehicle for business purposes operating expenses would be al Jowable deductions, provisions have been made In these rules to al low for reduction of the value of the benefit to be applied to gross Income. This Is cal Jed a working condition fringe, and Is the amount that would be allowable as a deduction If the employee paid for the avallablllty of the vehicle. Assume the ALV of an employer-provided vehicle Is $2,000 and the employee drives 6,000 miles for the employer and 2,000 miles tor non-business reasons. The value of the working condition fringe Is $2,000 multlplled by the traction, the numerator of which ls the business-use mileage ( 6,000 miles) and the denominator the total use mileage ( 8,000 miles). The computation: $2,000 x 6,000/ 8,000 = $ 1,500. Thus, the value of the working condition fringe ls $ 1,500, and the total amount Included Jn gross Income by the employee Is $500. This provision requires that the employee maintain thorough records on all mileage driven, especial Jy mileage related to city business. An example of the type of record that should be kept ls attached. These records must be provided to the official designated to collect such data Jn the city In order to determine the amount of working fringe benefit the employee Is entitled. 3 REPORTING The city has some flexlbl llty as to when lt considers the benefits presented ln this bulletin have been paid to the employee, as long as lt ls paid on o r  before the last day of the calendar quarter In which the benefit ts provided. Benefits provided during the first calendar quarter of 1985 may be deemed paid on or before the last day of the second calendar quarter. This Is a one-time provision due to the late publ !cation of rules. It wll I be the responslbll tty of the city to report, at least quarterly, the benef It employees derive from the use of city-owned vehicles. Such benefits are considered to be supplemental Income, which Is subject to a flat 20% wlthholdlng from the employee's wages and Is subject to social security taxes. Until such time as final rules are Issued regarding this matter, MTA S recommends that al I cltles which provide city-owned vehlcles to city employees begin to keep contemporous records as discussed above (see attached suggested form). The exception to the necessity for record-keeping relates to those employees who are required to commute In city-owned vehlcles. As long as the $3 per day value as discussed above Is Included ln the employee's Income, no record-keeping Is required. Al I city offlclals should consult with their city attorney, their auditors, accountants, and other offlclals responsible In any way for the administration of federal employment taxes. Contact any MTAS office for addltlonal assistance. 4 •: • • • > t t " .Onth: ___ , 1985 Dottlnalle>n-'ol'u,_ of Odomtttr Dot• Trlp--'Ccntact Begin· End > • TOTALS (Post to Car Recap 1t back) Car Mlluae & Operating Expenses Mlleagi INakda 111n ._ ... ... � ·-· ,.,. °"'· 011 P'arklng - . .... , - l.ullll -Toll• Other Dllcribo I . . . Total reimbursements for month , __ _ (b) Annual Lease Value. Select the dollar range in • column 1 of the table set f orth below, corresponding to the fair market value determined in (a). Except as otherwise provided in this O/A-13, the Annual Lease Value for each year of availability is the corresponding amount in column 2 of the table. Annual Lease Value Table (1) Automobile Fair Market Value $ 0 - 999 1,000 - 1,999 2,000 - 2,999 3,000 - 3,999 4,000 - 4,999 5,000 - 5,999 6,000 - 6,999 7 , 000 - 7 , 9 99 8,000 - 8,999 9,000 - 9,999 10,000 - 10,999 11,000 - 11,999 12,000 - 12,999 13,000 - 13,999 14,000 - 14,999 15,000 - 15,999 16,000 - 16,999 17,000 - 17,999 18,000 - 18,999 19,000 - 19,999 20,000 - 20,999 21,000 - 21,999 22,000 - 22,999 23,000 - 23,999 24,000 - 24,999 25,000 - 25,999 26,000 - 27,999 28,000 - 29,999 30,bOO - 31,999 32,000 - 33,999 34,000 - 35,999 36,000 - 37,999 38,000 - 39,999 40,000 - 41,999 42,000 - 43,999 44,000 - 45,999 46,000 - 47,999 48,000 - 49,999 (2) Annual Lease Value $ 600 850 1,100 1,350 1,600 1, 850 . 2,100 2,350 2,600 2,850 3,100 3,350 3,600 3,850 4,100 4,350 4,600 4,850 5,100 5 ,350 5,600 5,850 6, 100 6,350 6,600 6,850 7,250 7,750 8,250 8,750 9,250 9,750 10,250 10, 7 50 11,250 11, 7 50 12, 250 12,750 • • .. ' . , . • • • ' ' .• Automobile Fair Market Value 50,000 - 51,999 52,000 - 53,999 54,000 - 55,999 56,000 - 57,999 58,000 - 60,000 For vehicles having a fair $60,000, the Annual Lease Value fair market value) + $500. Annual Lease Value 13,250 13, 750 14,250 14, 750 15,250 market value in excess of is equal to: (.25 x automobile (c) Determination of Annual Lease Value after fourth year. Except as otherwise provided in (d), the figures in the Table are the Annual Lease Values for the period starting on the first date on which the special rule is applied by the e mployer or the employee to the automobile, and ending on December 31 of the fourth full year following that date. The Annual Lease Value for each of the subsequent calendar years is determined b y  taking the fair market value of the automobile on the January 1 following the period described in the previous sentence and selecting the amount in column 2 of the Table corresponding to the appropriate dollar range in column 1 of the Table • Municipal Technical Advisory Service 891 20th Street The University of Tennessee Knoxville, TN 37996-4400 • • Non�Profit Org. U.S. POSTAGE PAID Knoxville, Tenn. Permit No. 870 • 

Technical Bulletins: Changes in IRS Rules Regarding Employee Fringe Benefits

https://trace.tennessee.edu/cgi/viewcontent.cgi?article=1205&context=utk_mtastech

Technical Bulletins: Changes in IRS Rules Regarding Employee Fringe Benefits

Abstract

Similar works

Full text

Available Versions

University of Tennessee, Knoxville: Trace