Newsletter - Winter 2002
IRS Issues New Rules for Tax on Dealer Demos
by Edward J. Castellani
The Internal Revenue Service has issued new rules to clarify and simplify the tax on use of dealer demos. In general, the rules reduce the dealer record keeping requirements and reduce the income tax an employee must pay for use of a dealer demo. The new rules are effective January 1, 2002 and provide four new methods described below:
1. Simplified Method for Full Exclusion. Under this new method the salesperson will not have to pay any Federal income tax or FICA on the use of the vehicle and the reporting requirements for the employer and the employee are reduced.
2. Simplified Method for Partial Exclusion. This method provides an alternative to dealerships who provide vehicles to full-time salespersons and want to eliminate record keeping and don’t want to enforce the IRS restrictions on the number of miles the salesperson can drive the vehicle outside of normal working hours. The employee must report as income a fixed amount per day.
3. Simplified Method for Non Salespersons. This rule is available to non full-time salespersons without restrictions on the use of the vehicle by the employee. The employee must report a fixed dollar amount as income but the employee does not have to maintain any mileage logs or other records under this method. The employer has little recordkeeping requirements under this rule.
4. New General Rules When Above Rules are Not Used. If an employer does not use any of the above methods, but the employee has a policy restricting personal use of the vehicle, the employee is not required to keep logs or other records. The employer must reasonably believe there is no personal use except commuting and the employee must report income based on the fair market value of the vehicle.
Mr. Castellani is a member of our Business Department. He practices in the Lansing office and may be contacted at 517.377.0845 or toll free at 800.748.0436. You can also contact him via e-mail at ecastellani@fraserlawfirm.com.