Even though it has been many years since the issuance of the guidelines for the taxation on the use of demo vehicles by dealership employees, Downey & Company receives inquiries on a regular basis relating to demos and their status as “taxable fringe benefits.” This article will summarize our recommendations concerning compliance for dealers and serve as a reminder that these “taxable fringe benefits” should be included in a qualifying employee’s wages at least monthly.
According to the IRS, if an employer provides an employee with the use of a company owned or leased vehicle, the value of the employee’s personal use must be added to the employee’s gross income as a “taxable fringe benefit.” There are two categories of employees that these guidelines apply to: full-time salespersons and non-salespersons. To determine who qualifies as a full-time salesperson under the procedure, the employee: must be a full-time employee of the dealership; must spend at least half a normal business day performing the functions of a salesperson or sales manager; must be directly involved with the negotiation of sales to customers; and must derive 25% of their gross income as a result of sales activities. After determining which employees qualify as a full-time salesperson or not, the method in which to determine the value of the use of demo vehicle provided to these employees needs to be selected.
Downey & Company recommends using the Partial Exclusion Method for full-time salespersons and the Full Inclusion Method for all other employees. Please click here for more detailed information about these methods. The value of the vehicles should be determined using the “average look back method” for both. The “average look back method” values a vehicle based upon the average sales price of new or used vehicles sold in the prior year as the basis for the current year’s calculations. The average sale price is determined by dividing the total vehicle sales for the year by the number of vehicles sold. New and used average sale prices are determined separately. It is important to note that for new vehicle sales, F&I should not be included in the sale price, and for used vehicles retail sales should be used. Wholesale used vehicle sales are to be excluded from the calculation. The average sale price must be determined in January of each year and must be applied no later than February of that year. For clarification, an example of the “average look back method” calculation is provided.
Once the average sale price value is calculated, the taxable inclusion amount is determined by using a daily inclusion table. For a full-time salesperson, the daily inclusion amount can be found in Downey & Company’s Full-Time Salesperson Demo Vehicle Policy. It is a best practice to obtain signed demonstrator agreements annually from employees who are considered full-time salespersons. For a non-salesperson, the taxable inclusion amount can be found in the Full Inclusion Daily Inclusion Table. The daily rate is applied to the total number of days the demo is available for use and the amount must be included in the employee’s wages at least monthly.
If you have any questions regarding this article, please contact Paul McGovern at 800-849-6022 or PMcGovern@DowneyCoCPA.com.
