Rev. Proc. 90-34

Rev. Proc. 90-34

SECTION 1. PURPOSE

This revenue procedure amplifies Rev. Proc. 89-66, 1989-52 I.R.B. 13, by providing an additional method under which the amount of ordinary and necessary expenses paid or incurred by an employee in driving an automobile in connection with the performance of services as an employee of the employer will be deemed substantiated under section 1.274-5T of the temporary Income Tax Regulations when a payor (the employer, its agent, or a third party) provides a mileage allowance under a reimbursement or other expense allowance arrangement to pay for such expenses.

SEC. 2. PROCEDURE

Rev. Proc. 89-66 is hereby amplified by modifying existing section 3.03, adding new sections 3.04 and 7, and modifying and renumbering existing sections 7 and 8 as sections 8 and 9, as follows:

SEC. 3. DEFINITIONS

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03 MILEAGE ALLOWANCE. The term "mileage allowance" means a payment under a reimbursement or other expense allowance arrangement that meets the requirements specified in section 1.62-2T(c)(1) of the temporary regulations and that

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(3) is paid at the applicable standard mileage rate, a flat rate or stated schedule, or in accordance with any other Service-specified rate or schedule.

04 FLAT RATE OR STATED SCHEDULE. A mileage allowance is paid at a flat rate or stated schedule if it is provided on a uniform and objective basis with respect to the expenses described in section 3.03 above. Such allowance may be paid periodically at a fixed rate, at a cents-per-mile rate, at a variable rate based on a stated schedule, at a rate that combines any of these rates, or on any other basis that is consistently applied and in accordance with reasonable business practice. Thus, for example, a periodic payment at a fixed rate to cover the fixed costs (including depreciation, insurance, registration and license fees, and personal property taxes) of driving an automobile in connection with the performance of services as an employee of the employer, coupled with a periodic payment at a cents-per-mile rate to cover the operating costs (including gasoline and all taxes thereon, oil, tires, and routine maintenance and repairs) of using an automobile for such purposes, is an allowance paid at a flat rate or stated schedule. Likewise, a periodic payment at a variable rate based on a stated schedule for different locales to cover the costs of driving an automobile in connection with the performance of services as an employee is an allowance paid at a flat rate or stated schedule.

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SEC. 7. FIXED AND VARIABLE RATE ALLOWANCE

01 GENERAL RULES.

(1) This section provides rules under which the ordinary and necessary expenses paid or incurred by an employee in driving an automobile in connection with the performance of services as an employee of the employer will be deemed substantiated (in an amount determined under section 8 below) when a payor reimburses such expenses with a mileage allowance using a flat rate or stated schedule that combines periodic fixed and variable rate payments that meet all the requirements in this section 7 (a FAVR allowance).

(2) The amount of a FAVR allowance must be based on data that (a) is derived from the base locality, (b) reflects retail prices paid by consumers, and (c) is reasonable and statistically defensible in approximating the actual expenses of employees receiving the allowance.

02 DEFINITIONS.

(1) FAVR ALLOWANCE. A FAVR allowance includes periodic fixed payments and periodic variable payments. A payor may maintain more than one FAVR allowance. A FAVR allowance that uses the same payor, standard automobile (or an automobile of the same make and model that is comparably equipped), retention period, and business use percentage is considered one FAVR allowance, even though other features of the allowance may vary. A FAVR allowance also includes any optional high mileage payments; however, such optional high mileage payments are included in the employee's gross income and are subject to the reporting and employment tax withholding and payment rules. See section 8 below. An optional high mileage payment covers the additional depreciation for a standard automobile attributable to business miles driven and substantiated by the employee for a calendar year in excess of the annual business mileage for that year. If an employee is covered by the FAVR allowance for less than the entire calendar year, the annual business mileage may be prorated on a monthly basis for purposes of the preceding sentence.

(2) PERIODIC FIXED PAYMENT. A periodic fixed payment covers the projected fixed costs (including depreciation, insurance, registration and license fees, and personal property taxes) of driving a standard automobile in connection with the performance of services as an employee of the employer in a base locality, and must be paid at least quarterly. A periodic fixed payment may be computed by (a) dividing the total projected fixed costs for the standard automobile for all years of the retention period, determined at the beginning of the retention period, by the number of periodic fixed payments in the retention period, and (b) multiplying the resulting amount by the business use percentage.

(3) PERIODIC VARIABLE PAYMENT. A periodic variable payment covers the projected operating costs (including gasoline and all taxes thereon, oil, tires, and routine maintenance and repairs) of driving a standard automobile in connection with the performance of services as an employee of the employer in a base locality, and must be paid at least quarterly. The rate of a periodic variable payment for a computation period may be computed by dividing the total projected operating costs for the standard automobile for the computation period, determined at the beginning of the computation period, by the computation period mileage. A computation period can be any period of a year or less. Computation period mileage is the total mileage (business and personal) a payor reasonably projects a standard automobile will be driven during a computation period and equals the retention mileage divided by the number of computation periods in the retention period. For each business mile substantiated by the employee for the computation period, the periodic variable payment must be paid at a rate that does not exceed the rate for that computation period.

(4) BASE LOCALITY. A base locality is the particular geographic locality or region of the United States in which the costs of driving an automobile in connection with the performance of services as an employee of the employer are generally paid or incurred by the employee. Thus, for purposes of determining the amount of fixed costs, the base locality is generally the geographic locality or region in which the employee resides. For purposes of determining the amount of operating costs, the base locality is generally the geographic locality or region in which the employee drives the automobile in connection with the performance of services as an employee of the employer.

(5) STANDARD AUTOMOBILE. A standard automobile is the automobile selected by the payor on which a specific FAVR allowance is based.

(6) STANDARD AUTOMOBILE COST. The standard automobile cost for a calendar year may not exceed 95 percent of the sum of (a) the retail dealer invoice cost of the standard automobile in the base locality, and (b) state and local sales or use taxes applicable on the purchase of such an automobile. Further, the standard automobile cost may not exceed $22,500.

(7) ANNUAL MILEAGE. Annual mileage is the total mileage (business and personal) a payor reasonably projects a standard automobile will be driven during a calendar year. Annual mileage equals the annual business mileage divided by the business use percentage.

(8) ANNUAL BUSINESS MILEAGE. Annual business mileage is the mileage a payor reasonably projects a standard automobile will be driven by an employee in connection with the performance of services as an employee of the employer during the calendar year, but may not be less than 6,250 miles for a calendar year. Annual business mileage equals the annual mileage multiplied by the business use percentage.

(9) BUSINESS USE PERCENTAGE. A business use percentage is determined by dividing the annual business mileage by the annual mileage. The business use percentage may not exceed 75 percent. In lieu of demonstrating the reasonableness of the business use percentage based on records of total mileage and business mileage driven by the employees annually, a payor may use a business use percentage that is less than or equal to the following percentages for a FAVR allowance that is paid for the following annual business mileage:

      Annual business mileage            Business use percentage

(11) RETENTION MILEAGE. Retention mileage is the annual mileage multiplied by the number of calendar years in the retention period.

(12) RESIDUAL VALUE. The residual value of a standard automobile is the projected amount for which it could be sold at the end of the retention period after being driven the retention mileage. The Service will accept the following safe harbor residual values for a standard automobile computed as a percentage of the standard automobile cost:

           Retention period            Residual value

(1) Except as provided in section 7.03(2) below, a deduction computed using a FAVR allowance is in lieu of all the operating and fixed costs paid or incurred by an employee in driving the automobile in connection with the performance of services as an employee of the employer.

(2) Parking fees and tolls attributable to an employee driving the standard automobile in connection with the performance of services as an employee of the employer are not included in fixed and operating costs and may be deducted as separate items. Similarly, interest relating to the purchase of the standard automobile may be deducted as a separate item but only to the extent that the interest is deductible under section 163 of the Code.

04 DEPRECIATION.

(1) A FAVR allowance may not be paid with respect to an automobile for which the employee has claimed (a) depreciation using a method other than straight-line for its estimated useful life, (b) additional first-year depreciation, or (c) depreciation using the Accelerated Cost Recovery System (ACRS) under section 168 of the Code. If an employee uses actual costs for an automobile that has been covered by a FAVR allowance, the employee must use straight-line depreciation for the automobile's estimated useful life (subject to the applicable depreciation deduction limitations under section 280F for any passenger automobile).

(2) The total amount of the depreciation component for the retention period taken into account in computing the periodic fixed payments for that retention period may not exceed the excess of the standard automobile cost over the residual value of the standard automobile. In addition, the total amount of such depreciation component may not exceed the sum of the annual section 280F limitations on depreciation (in effect at the beginning of the retention period) that apply to the standard automobile during the retention period.

(3) The depreciation included in each periodic fixed payment portion of a FAVR allowance paid with respect to an automobile will reduce the basis of the automobile (but not below zero) in determining adjusted basis as required by section 1016 of the Code. See section 7.07(2) below for the requirement that the employer report the depreciation component of a periodic fixed payment to the employee.

05 FAVR ALLOWANCE LIMITATIONS.

(1) A FAVR allowance may be paid only to an employee who substantiates to the payor for a calendar year at least 5,000 miles driven in connection with the performance of services as an employee of the employer or, if greater, 80 percent of the annual business mileage of that FAVR allowance. If the employee is covered by the FAVR allowance for less than the entire calendar year, these limits may be prorated on a monthly basis.

(2) A FAVR allowance may not be paid to a control employee (as defined in section 1.61-21(f)(5) and (6) of the regulations, excluding the $100,000 limitation in paragraph (f)(5)(iii)).

(3) At no time during a calendar year may a majority of the employees covered by a FAVR allowance be management employees.

(4) At all times during a calendar year at least 10 employees of an employer must be covered by one or more FAVR allowances.

(5) A FAVR allowance may be paid only with respect to an automobile (a) that is owned by the employee receiving the payment, (b) that costs, when new, at least 90 percent of the standard automobile cost taken into account for purposes of determining the FAVR allowance for the first calendar year the employee receives the allowance with respect to that automobile, and (c) the model year of which does not differ from the current calendar year by more than the number of years in the retention period.

(6) The insurance cost component of a FAVR allowance must be based on the rates charged in the base locality for insurance coverage on the standard automobile during the current calendar year without taking into account such rate-increasing factors as poor driving records or young drivers.

(7) A FAVR allowance may be paid only to an employee whose insurance coverage limits on the automobile with respect to which the FAVR allowance is paid are at least equal to the insurance coverage limits used to compute the periodic fixed payment under that FAVR allowance.

06 EMPLOYEE REPORTING. Within 30 days after an employee's automobile is initially covered by a FAVR allowance, or is again covered by a FAVR allowance if such coverage has lapsed, the employee by written declaration must provide the payor with the following information: (a) the make, model, and year of the automobile owned by the employee, (b) written proof of the insurance coverage limits on the automobile, (c) the odometer reading of the automobile, (d) the purchase price of the automobile, and (e) whether the employee has claimed depreciation with respect to the automobile using any of the depreciation methods prohibited by section 7.04(1) above. The information described in (a), (b), and (c) of the preceding sentence also must be supplied by the employee to the payor within 30 days after the beginning of each calendar year that the employee's automobile is covered by a FAVR allowance.

07 PAYOR RECORDKEEPING AND REPORTING.

(1) The payor or its agent must maintain written records setting forth (a) the statistical data and projections on which the FAVR allowance payments are based, and (b) the information provided by the employees pursuant to section 7.06 above.

(2) Within 30 days of the end of each calendar year, the employer must provide each employee covered by a FAVR allowance during that year with a statement listing the amount of depreciation included in each periodic fixed payment portion of the FAVR allowance paid during that calendar year and explaining that by receiving a FAVR allowance the employee has elected to exclude the automobile from ACRS pursuant to section 168(f)(1) of the Code.

08 FAILURE TO MEET SECTION 7 REQUIREMENTS. If an employee receives a mileage allowance that fails to meet one or more of the requirements of this section 7, the employee may not be treated as covered by any FAVR allowance of the payor during the period of such failure. Nevertheless, the expenses to which that mileage allowance relates may be deemed substantiated using the method described in section 4 above and section 8.01(1) and 8.02 below to the extent the requirements of those sections are met.

SEC. 8. ACCOUNTING TO PAYOR

01 If a payor pays a mileage allowance in lieu of reimbursing actual transportation expenses incurred or to be incurred by an employee, the amount of the expenses that is deemed substantiated to the payor is either

(1) for any mileage allowance other than a FAVR allowance (as described in section 7 above), the lesser of the amount paid under the mileage allowance or the applicable standard mileage rate in section 4.01 or 5.01 above multiplied by the number of business miles substantiated by the employee; or

(2) for a FAVR allowance (as described in section 7 above), the amount paid under the FAVR allowance less the sum of (a) any portion of a periodic variable payment that relates to miles in excess of the business miles substantiated by the employee and that the employee fails to return to the payor although required to do so, (b) any portion of a periodic fixed payment that relates to a period during which the employee was not covered by the FAVR allowance and that the employee fails to return to the payor although required to do so, and (c) any optional high mileage payments.

02 If the amount of a transportation expense is deemed substantiated under the rule provided in section 8.01 above, and the employee actually substantiates to the payor the elements of time, place (or use), and business purpose of the transportation expense in accordance with paragraphs (b)(2) (travel away from home), (b)(6) (listed property, which includes passenger automobiles and any other property used as a means of transportation), and (c) of section 1.274-5T of the temporary regulations, the employee is deemed to satisfy the adequate accounting requirements of section 1.274-5T(f) as well as the requirement to substantiate by adequate records or other sufficient evidence for purposes of section 1.274-5T(c).

03 An arrangement providing mileage allowances will be treated as satisfying the requirement of section 1.62-2T(f)(2) of the temporary regulations with respect to returning amounts in excess of expenses as follows:

(1) For a mileage allowance other than a FAVR allowance (as described in section 7 above), the requirement to return excess amounts will be treated as satisfied if the employee is required to return any portion of such an allowance that relates to miles of travel not substantiated by the employee, even though the arrangement does not require the employee to return the portion of such an allowance that exceeds the amount of the employee's expenses deemed substantiated. For example, assume a payor provides an employee an advance mileage allowance of $60 based on an anticipated 200 business miles at 30 cents per mile (at a time when the applicable business standard mileage rate is 26 cents per mile), and the employee substantiates 120 business miles. The requirement to return excess amounts will be treated as satisfied if the employee is required to return the portion of the allowance that is attributable to the 80 unsubstantiated business miles ($24), even though the employee is not required to return the portion of the allowance ($4.80) that exceeds the amount of the employee's expenses deemed substantiated under section 8.01 above ($31.20) for the 120 substantiated business miles. However, the 84.80 excess portion of the allowance is treated as paid under a nonaccountable plan as discussed below in section 8.05.

(2) For a FAVR allowance (as described in section 7 above), the requirement to return excess amounts will be treated as satisfied if the employee is required to return (a) any portion of a periodic variable payment received that relates to miles in excess of the business miles substantiated by the employee, and (b) any portion of a periodic fixed payment that relates to a period during which the employee was not covered by the FAVR allowance.

04 An employee is not required to include in gross income the portion of a mileage allowance received from a payor that is less than or equal to the amount deemed substantiated under section 8.01 above, provided the employee substantiates in accordance with section 8.02 above. See section 1.274-5T(f)(2)(i) of the temporary regulations. In addition, such portion of the allowance is treated as paid under an accountable plan, is not required to be reported on the employee's Form W-2, and is exempt from the withholding and payment of employment taxes. See section 1.62-2T(c)(2) and (c)(4).

05 An employee is required to include in gross income only the portion of a mileage allowance received from a payor that exceeds the amount deemed substantiated under section 8.01 above, provided the employee substantiates in accordance with section 8.02 above. See section 1.274-5T(f)(2)(ii) of the temporary regulations. In addition, the excess portion of the allowance is treated as paid under a nonaccountable plan, is required to be reported on the employee's Form W-2, and is subject to withholding and payment of employment taxes. See section 1.62-2T(c)(3)(ii) and (c)(5).

06 If the amount of the expenses deemed substantiated under the rules provided in section 8.01 above is less than the amount of the employee's business transportation expenses, the employee may claim an itemized deduction for the amount by which the business transportation expenses exceed the amount that is deemed substantiated, provided the employee substantiates all the business transportation expenses, includes on Form 2106, Employee Business Expenses, the deemed substantiated portion of the mileage allowance received from the payor, and includes in gross income the portion (if any) of the mileage allowance received from the payor that exceeds the amount deemed substantiated. See section 1.274-5T(f)(2)(iii) of the temporary regulations. However, for purposes of claiming this itemized deduction, substantiation of the amount of the expenses is not required if the employee is claiming a deduction that is equal to or less than the applicable standard mileage rate multiplied by the number of business miles substantiated by the employee minus the amount deemed substantiated under section 8.01 above. The itemized deduction is subject to the 2-percent floor on miscellaneous itemized deductions provided in section 67.

SEC. 9. EFFECT ON OTHER DOCUMENTS

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DRAFTING INFORMATION

The principal author of this revenue procedure is Beverly A. Baughman of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. Baughman on (202) 566-5985 (not a toll-free call).