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If you provide a vehicle to an employee for the entire year, to use for business and personal driving, you may put a price tag on this fringe benefit for tax purposes by using the vehicle's annual lease value.
A vehicle's annual lease value is based on the fair market value of the vehicle when it is first available for personal use and is determined under an annual lease value table provided by the IRS.
If the employee uses the vehicle for business purposes at least some of the time, the value of the business usage (determined under either the standard mileage rate or actual cost method) can be subtracted from the annual lease value to determine the net value of the employee's taxable fringe benefit. Or, if you wish, you can include the entire value of the lease as a taxable fringe, and the employee could then claim a tax deduction for the business usage on his or her individual tax return.
A special fleet-average valuation rule applies to employers that have 20 or more qualifying cars.
Calculating the annual lease value. The annual lease value table provided by the IRS is based on a four-year lease term. The annual lease value taken from the table must, therefore, be used for each of the three subsequent calendar years if the vehicle continues to be available to the employee. At the beginning of the fifth year (and every four years thereafter) the annual lease value may be redetermined based on the fair market value of the vehicle on January 1 of that year. A recalculation may also be made if a vehicle is transferred to another employee, based on the vehicle's fair market value as of January 1 of the year of the transfer (or at the beginning of an employer's special accounting period, if any).
For purposes of calculating the annual lease value of a vehicle owned by you, the employer, the fair market value of the vehicle is generally your cost to purchase the vehicle, provided that the purchase is made at arm's length. For purposes of calculating the annual lease value of a vehicle that is leased by you or is being revalued after four years of use by an employee of yours, one way that the fair market value may be determined is by using the retail value of the vehicle as reported in a nationally recognized pricing source (publications or electronic data bases) that regularly reports new or used vehicle retail values. The values contained in the publication must be reasonable with respect to the vehicle being valued.
A vehicle's fair market value does not include the fair market value of any telephone, FAX, or specialized equipment added to or carried in the vehicle if the presence of that equipment is necessitated by, and attributable to, your business needs as the employer. An employee is, however, required to include in income the value of such equipment that is used for personal purposes or in a business other than yours.
The value of a vehicle that is made available to an employee for less than a year but for at least 30 days is measured by a prorated annual lease value (that is, the annual lease value multiplied by the number of days during the year the vehicle was available to the employee and divided by 365 or 366). The value of a vehicle that is made available to an employee for less than 30 days is determined using the daily lease value. The daily lease value is calculated by multiplying the applicable annual lease value by four times the number of days of availability and dividing by 365 or 366. When the period of availability is one or more days but less than 30, the value of the benefit may be calculated under the prorated annual lease value as if the vehicle had been available for 30 days, if this method results in a lower valuation than applying the daily lease value.
A vehicle is not considered unavailable to an employee if the period of unavailability is due to personal reasons of the employee. For example, if an employee is given a vehicle to use for an entire year except for the month the employee is on vacation, the annual lease value must be used rather than the prorated value based on 11 months of use.
Further restrictions on the annual lease method. You may not use the annual lease valuation method unless it was adopted when the vehicle was first made available to an employee for personal use. Your employee may adopt the annual lease valuation method only if the method is adopted by you and only if it is adopted when the vehicle was first made available to the employee. Once the rule is adopted, it must be used for all subsequent periods (except when the commuting valuation rule is used).