Page 23 - On The Move - Volume 17, Issue 1

lmost two decades ago, the Internal Revenue Service (IRS) released
ARevenue Procedure 2001-56, which provides auto dealerships
with simplified methods to determine the income inclusion or exclusion
amount for employees who are provided vehicles by the dealership.
While the guidance is not new, and also not mandatory, it’s still

important for dealers to understand their significance, especially if
you hope to avoid hefty penalties from a potential IRS examination.

Original guidance from the IRS was issued so full-time automobile salespersons were not taxed
on the value of a qualified auto for demonstration (demo) purposes. Certain restrictions apply,
including that the vehicle must be in current inventory and available for test drives, must be used
in the sales area of the dealer and must be subject to significant restrictions on personal use, such
By Adam Neporadny as mileage limits and when the vehicle can be used, i.e., not on personal vacations or for storage
Managing Director of personal items. The optional methods include the following:
DHG
• Simplified method for full exclusion of qualified automobile demo use, or the Simplified
Out/In Method. Per the guidance, this method is only available to qualified salespersons
(employed full-time by an automobile dealer, derives at least 25 percent of gross
income from sales activity, spends at least half of their time as a floor salesperson or
manager and directly engages in the promotion and negotiation of sales of vehicles to
customers) and requires a qualified written policy. Personal use is limited to commuting
plus an average of 10 miles per day, and the salesperson must maintain a mileage
log.
• Simplified partial exclusion method. As with the Simplified Out/In Method, the partial
exclusion applies only to qualified salespersons, requires a qualified written policy,
but does allow for some personal use and no mileage log. However, the amount to be
included in the salesperson’s income must occur no less often than monthly.
• Simplified full inclusion method. This method is for salespersons who TAX
do not meet qualifications for the other exclusions as well as all other
employees. The value of the use of the vehicle must be included in
the employee’s income no less than monthly, without the need to
consider actual business use of the vehicle.

When these methods are not applied, there is also a general rule stating that
the amount required to be included in an employee’s income should be the fair
market value of the use of the demo vehicle. Under the partial exclusion or full inclusion method,
the value of provided demo vehicles can be determined by using the annual average look back
method, which is based on the average sales price and number of vehicles sold in the previous year.
There are tables available for each method which provide for the daily inclusion amount dependent
on the value of the demo automobile. These tables can be found in Revenue Procedure 2001-56
(https://www.irs.gov/pub/irs-drop/rp-01-56.pdf).

Generally, dealers may wish to use the partial exclusion for full-time salespersons and the full
inclusion method for all other employees, but it is strongly recommended that dealers discuss
the methods with a tax advisor to determine which would best suit their needs, especially as we
prepare to head into a new year. In addition, there are several advantages to using the optional
methods, including:

• Ability to provide a good response to the IRS in the course of an examination
• No need to keep mileage logs, unless using the full exclusion method
• Personal use is allowed, with varying degrees depending on which method is chosen
• Methods may be selected on an employee-by-employee basis

While these methods may act as a safe-harbor for dealers who choose to adopt them, the rules
are still complex and may require the help of a tax advisor, so now is the time to check demo use
policies and make certain they maintain proper compliance.

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