DEMONSTRATOR
VEHICLE
GUIDELINES
The Mironov Group, LLC
THEMIRONOVGROUP,LLC
DEMONSTRATORVEHICLEGUIDELINES
Dealerships, as you probably realize, are required to report their employees’ amount of income that is subject to tax. This includes not only wages but various fringe benefits. While many fringe benefits are taxable, there are exclusions when the benefit is required for the employee to properly perform their job. That is where the controversy of providing demonstrator (demo) vehicles arose. For a full‐time sales person arguments for exclusion can be made under general IRS guidelines dating back to 1984. The water becomes muddier as we look at demos provided to other managers, employees and family. Because of these various issues, since 2001, the IRS has had in place procedures (Revenue Procedure 2001‐ 56) to allow for optional and simplified methods for the income tax treatment of demonstrator vehicles provided to employees. The taxable value of demos provided to employees can be determined under one of four methods. Keep in mind, the dealership is responsible for reporting the proper amount of taxable income. Not only will it reflect in the dealership’s portion of employment taxes, you have to assure the proper withholdings are made and an accurate Form W‐2 is issued to the employees. Failure to do this may make the dealership liable for the employer and employee portions of payroll tax, as well as interest and penalties. You will pay for everything. Also, remember these methods are optional. However, if you use your own method of reporting the value of the vehicle (such as an arbitrary value simply applied to the employee’s income) or fail to follow ALL the rules of the methods described later you run the risk of overstating or understating taxable income. The problem with overstating is unnecessary tax will be paid by the dealership and employee. Understated income again makes the dealership liable for both portions of the tax, plus penalties and interest. The IRS will not let a dealership retroactively chose a compliant methodology simply because you will not have the mileage logs, policies, etc that will be described in this manual in order to do so. Observations
For demos provided to salespeople, the Partial Exclusion Method will be preferable because record keeping requirements are minimal and the risk of additional IRS tax assessments is greatly reduced. For demos provided to other employees, use the Full Inclusion Method unless employee is willing to maintain detailed mileage records required for Annual Lease Value Method. © 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900 TAXTREATMENTOFDEMONSTRATORVEHICLES–FOURMETHODS
The methods outlined in Rev. Proc. 2001‐56 are considered “simplified” and are normally the most advantageous in tax, paperwork and compliance. The procedure requires that the dealership determine the correct method at least monthly. That means that based on the employee’s use of the demo they can be reassessed monthly as towards their eligibility for one of the four methods. A full‐time salesperson could be assessed as Full‐Exclusion one month and because of personal use be moved to Partial‐Exclusion the next. Again, there might be other methods that would be acceptable to the IRS but generally the proof of use and application to any exemptions falls on the shoulders of the dealership. The 2002 simplified methods allow the dealership some safe harbor as long as they are in compliance with the procedures. Typically, the default for the IRS would be the Fair Market Value method which is the least favorite tax position for the dealership and employee. For example, if demo vehicles are swapped out every three months the fair market value would be to quote a three‐month lease on a new vehicle. It would not be just using three months of payments on a 36‐ or 48‐month lease. Full‐Time Salespeople Method #1 Full Exclusion Method The value of the demo is completely excluded from the employee's taxable wages.  Employer must maintain detailed mileage records (Mileage Log)  Written policy required  Personal use cannot exceed commuting plus average of ten miles per day Method #2 Partial Exclusion Method The value of the demo is partially excluded from the employee's taxable wages.  Written policy required  Taxable value of demo is a daily inclusion amount based upon the average sales price of the dealer's new vehicles (or used vehicles, if applicable) from the prior year  No reduction of taxable value allowed for business use of demo  Taxable value of demo must be included in employee's taxable wages on a monthly basis All Other Employees Method #3 Full Inclusion Method The full value of the demo is included in the employee's taxable wages.  Taxable value of demo is a daily inclusion amount based upon the average sales price of the dealer's new vehicles [using total sales divided by units] (or used vehicles, if applicable) from the prior year © 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900  No reduction of taxable value allowed for business use of demo  Taxable value of demo must be included in employee's taxable wages on a monthly basis Method #4 Annual Lease Value Method Taxable value of demo is fully or partially included in the employee's taxable wages.  Taxable value of demo is the ALV table amount that corresponds with the demo's suggested selling price  Reduction for business use allowed, but must maintain detailed mileage records  Taxable value of demo must be included in employee's taxable wages on an annual basis  Use this method for non‐employees who drive dealership vehicles (reduction for business use not allowed) GENERAL INFORMATION 
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Demonstrator – An automobile that must be available for sale and/or “demonstration” during normal business hours. Full‐Time Salesperson ‐ An employee that works 1 ,000 + hours per year, spends at least 50% of business hours engaged in direct sales activity and derives at least 25% of compensation from sales activities. The IRS privately has ruled that the person’s time must be spent directly with customers in selling vehicles. This means that many general managers and owners who have limited direct contact with sales clients during the purchase process would not qualify. The IRS also has taken a dim view of F&I managers as full‐time sales people as someone engaged in the sale of finance products, not vehicles. Some stores have successfully argued F&I are full‐time sales as no deal is final until completed by them, but there is a risk to the dealership who must demonstrate the reason the manager should be included in the definition. Mileage Log ‐ Full‐Exclusion Method – a daily record of in and out odometer readings and daily business miles. Sample Mileage Log is attached. Without adequate proof of business use, the IRS considers all use to be personal. Mileage Log ‐ Annual Lease Value Method – a daily record of business miles and applicable business purpose. Sample Mileage Log is attached. Without adequate proof of business use, the IRS considers all use to be personal. Written Policy ‐ must state that personal use is limited. Sample policy statements for Full Exclusion and Partial Exclusion methods are attached. Partial Exclusion Daily Inclusion Amount ‐ IRS table showing the taxable value of demos when this method is used. A sample worksheet and table attached. Average selling price of used vehicles – Is calculated using both retail and wholesale units which can result in a substantially lower tax burden than new vehicles. Full Inclusion Daily Inclusion Amount ‐ IRS table showing the taxable value of demos when this method is used. A sample worksheet and table attached. Annual Lease Value (ALV) ‐ IRS table showing the taxable value of demos when this method is used. A sample worksheet and table attached. © 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900 
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Insurance and Maintenance – The tables amounts shown in the attached worksheets include the cost of maintenance and insurance (specifically for ALV and implied with other methods). There is not a provision for reducing the amount if the dealer does not pay the insurance or maintenance. Fuel – Fuel is not included in the table amounts. If the dealership provides the employee fuel it can be charged at market rates (with the burden of proof on the dealership) or at a rate of 5.5 cents per mile. MAKING CORRECTIONS There is a correction policy that allows you to correct errors only during the calendar year in which the demo has been provided. This is generally only allowed to move an employee from Full or Partial exclusion to another method. If the error is not corrected the IRS will generally assess the demo at market‐value for corrective action back to the initial in‐service date as a demo. Because of this it is important that dealerships rule the application of the various methods and their employees’ status before the end of every calendar year in order to make corrections. © 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900 SalesandUseTaxofDemonstrators
The following relates to some of the sale/use tax implications of demonstrators in New Jersey, New York and Pennsylvania. NewJerseyStateRules
In New Jersey, vehicles removed from stock and used as demonstrators by full‐time salespersons are exempt from use tax. However, all other demos that are taken out of stock and used for business or personal purposes by the owner, a relative of the owner, or an official or employee of the dealer's company do require use tax to be paid.  The tax shall be computed and paid monthly by the retail dealer as part of the regular monthly report of taxes due on the sale and use of taxable property or services.  The basis for the tax shall be determined by multiplying .25 times the sum of the manufacturer's suggested list price of the motor vehicle plus $500.  For a used motor vehicle, the basis for the tax shall be determined by multiplying .25 times the sum of the average retail price listed for the vehicle in the NADA Official Used Car Guide, or similar official guides for other categories of used vehicles, for the year and month of withdrawal, plus $500.  In computing the tax, the basis for the tax as computed above shall be divided by 12 and the result multiplied by .07. NewYorkStateRules
The term “Demonstrator” is defined as vehicles held in a dealer’s inventory exclusively for resale, but used for demonstration purposes to prospective customers, and are not taxable if used solely for customer demonstration. In nearly all cases a demonstrator will be considered a “mixed use” vehicle. Any motor vehicle held in a dealer’s inventory for resale, but used occasionally for business or pleasure by the dealer or one of its owners or employees, is subject to tax as a mixed‐use vehicle. Use tax due on a mixed‐use vehicle must be reported and paid on the dealer’s sales tax return under purchases subject to use tax with the sales tax return that covers the period of use. 1% method for each month of mixed use Use tax on a mixed‐use vehicle may be calculated by multiplying the dealer’s total cost of the vehicle by 1% per month, for each month of mixed use. That amount is then multiplied by the sales tax rate in effect in the taxing jurisdiction where the dealership is located. A vehicle has been used for a month of mixed use if it has been used during any part of the month. A motor vehicle dealer may pay use tax on mixed‐use vehicles based on the 1% method, provided that the vehicle is held in inventory, is available for sale, and is used by the dealer:  For six months or less as a mixed‐use vehicle with no mileage restriction; or © 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900  For more than six months but no more than one year, and the mileage does not exceed 15,000 miles for the entire 12 months.  If mileage exceeds 15,000 miles and the vehicle is used for more than six months, or if the vehicle is used by the dealer for more than 12 months, regardless of mileage, use tax is due based on the dealer’s total cost of the vehicle, plus penalties and interest.  There are record‐keeping rules for vehicles that qualify for the 1% method. Dealers must maintain adequate records to verify the use of a vehicle as a mixed‐use vehicle. All the following information must be retained for each vehicle: o stock number and vehicle identification number (VIN); o name and title of person to whom the vehicle is assigned; o dates assigned and dates returned; o mileage at date of assignment and date of return; o disposition of vehicle; o whether registration is in the dealer’s name or the vehicle is used with dealer plates; o whether depreciation or an investment tax credit has been or will be claimed on the vehicle; and o whether a trade‐in allowance has been or will be taken on the vehicle. Note: If a vehicle was previously used as a mixed use vehicle but it can be documented that no mixed use occurred with the respect to that vehicle in a subsequent month, no use tax will be due for that vehicle for that month. Vehicles that do not qualify for the 1% method A vehicle does not qualify for the 1% method of computing use tax if:  the dealer seeks or intends to seek a trade‐in allowance on the vehicle; or  the dealer depreciates or takes an investment tax credit for the vehicle. If a vehicle is disqualified under either of these conditions but the dealer had calculated use tax under the 1% method, the use tax is due on the dealer’s total cost of the vehicle, plus penalties and interest, calculated from the due date of a tax return covering the first time the vehicle was used. Credit is allowed for use tax already paid using the 1% method. Any vehicle assigned to a family member who is not an owner, officer, or employee of the dealer, does not qualify for the 1% method of calculating use tax. Tax is due on the entire cost of the vehicle. © 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900 PennsylvaniaStateRules
The State of Pennsylvania taxes all demonstrators as the equivalent to rental vehicles.  Proper jurisdiction use tax (typically 6% for most of the State) must be paid monthly on the fair rental value of the vehicle (the amount charged for the rental of a vehicle in the market for a similar period of time and place) for the time that the vehicle is in taxable service.  If the fair rental value is unknown, 3% of the fair market purchase price at the time of acquisition is acceptable as a monthly fair market rental value. This method is generally done as no additional proof of the fair market vehicle is required.  Demonstrators should have less than one year of usage  Vehicles entered upon the dealer's demonstrator account are presumed to be used by the dealer for demonstration purposes. Therefore, use tax will be assessed upon the fair rental value of such vehicles.  The maintenance of records regarding the usage of demonstrator vehicles is required as the primary method of demonstrating to the Department of Revenue the taxable and nontaxable use of vehicles. This should include: o A vehicle’s date of acquisition and date of sale o Odometer readings at the time of acquisition and date of sale o Logs reflecting the taxable or nontaxable mileage accrued by individual vehicles.  If documentation is inadequate the State will equate the vehicle’s mileage (from date of acquisition) to months of taxable usage. Each 750 miles (or fraction thereof) of unrecorded mileage will be assessed one month of tax on the fair rental value (not to exceed actual in‐
service time).  Where the dealer claims that non‐taxable use has occurred (true demonstrations or inventory movement), the dealer has the burden of proof to rebut the assessment. The dealer will fail to rebut the presumption if the odometer reading on any vehicle so designated exceeds 8,000 miles. © 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900 Worksheet for Monthly Calculation of Taxable Demo Value Partial Exclusion Method – Full Time Salespeople Only Salesperson's Name______________________________________ Month/Year ____________ New Demos ‐ Taxable Value for the Month Average selling price of new vehicles (based on prior year's factory statement) Daily inclusion amount (using value above in table below) Days in the month x
Taxable value of demo (daily inclusion amount times the number of days in the month) Add: Fuel provided by employer (5.5₵ per mile) +
Less: Payments by salesperson for use of demonstrator ‐
Taxable amount for the month
=
Used Demos ‐ Taxable Value for the Month Average selling price of used vehicles (based on prior year's factory statement) Daily inclusion amount (using value above in table below) Days in the month x
Taxable value of demo (daily inclusion amount times the number of days in the month) Add: Fuel provided by employer (5.5₵ per mile) +
Less: Payments by salesperson for use of demonstrator ‐
Taxable amount for the month
=
Partial Exclusion Method Average Sales Price of Vehicles Daily Inclusion Amount
0 ‐ $14,999 $3
$15,000 ‐ $29,999 $6
$30,000 ‐ $44,999 $9
$45,000 ‐ $59,999 $13
$60,000 ‐ $74,999 $17
$75,000 and above $21
© 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900 Worksheet for Monthly Calculation of Taxable Demo Value Full Inclusion Method – All Employees
Employee's Name______________________________________ Month/Year ____________ New Demos ‐ Taxable Value for the Month
Average selling price of new vehicles (based on prior year's factory statement) Daily inclusion amount (using value above in table below)
Days in the month X Taxable value of demo (daily inclusion amount times the number of days in the month) Add: Fuel provided by employer (5.5₵ per mile)
+ Less: Payments by salesperson for use of demonstrator
‐ Taxable amount for the month
= Used Demos ‐ Taxable Value for the Month
Average selling price of used vehicles (based on prior year's factory statement) Daily inclusion amount (using value above in table below)
Days in the month X Taxable value of demo (daily inclusion amount times the number of days in the month) Add: Fuel provided by employer (5.5₵ per mile)
+ Less: Payments by salesperson for use of demonstrator
‐ Taxable amount for the month
= Full Inclusion Method Daily Inclusion Amount Table Avg. Sales Price of Vehicles $0 – 2,999 3,000 – 4,999 5,000 – 5,999 6,000 – 7,999 8,000 – 8,999 9,000 – 10,999 10,000 ‐ 11,999 12,000 ‐ 12,999 13,000 ‐ 14,999 15,000 ‐ 15,999 16,000 ‐ 17,999 18,000 ‐ 18,999 Daily Inclusion Amount $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14 Avg. Sales Price of Vehicles 19,000 ‐ 20,999 21,000 ‐ 21,999 22,000 ‐ 23,999 24,000 ‐ 24,999 25,000 ‐ 25,999 26,000 ‐ 27,999 28,000 ‐ 29,999 30,000 ‐ 31,999 32,000 ‐ 33,999 34,000 ‐ 35,999 36,000 ‐ 37,999 38,000 ‐ 39,999 Daily Inclusion Amount $15 $16 $17 $18 $19 $20 $21 $23 $24 $25 $27 $28 Daily Inclusion Amount $29 $31 $32 $34 $35 $36 $38 $39 $40 $42 Avg. Sales Price of Vehicles 40,000 ‐ 41,999 42,000 ‐ 43,999 44,000 ‐ 45,999 46,000 ‐ 47,999 48,000 ‐ 49,999 50,000 ‐ 51,999 52,000 ‐ 53,999 54,000 ‐ 55,999 56,000 ‐ 57,999 58,000 ‐ 59,999 For vehicles with value in excess of $59,999, the inclusion amount is (.25 x value) plus $500, divided by 365, rounded to nearest dollar.
© 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900 Worksheet for Monthly Calculation of Taxable Demo Value Annual Lease Value Method – All Employees
Employee's Name_____________________________________________ Month/Year _____________ Fair Market Value of demo Annual Lease Value (ALV from table below) Personal use percentage (personal miles divided by total miles) Taxable value of demo (ALV times personal percentage) %
Add: Fuel provided by employer (5.5₵ per mile) Less: Payments by salesperson for use of demonstrator Annual taxable amount
= (Annual taxable amount can be pro‐rated based on time in service) IRS Annual Lease Value Table Vehicle Fair Market Value $ 0 ‐ 999 $ 1,000 ‐ 1,999 $ 2,000 ‐ 2,999 $ 3,000 ‐ 3,999 $ 4,000 ‐ 4,999 $ 5,000 ‐ 5,999 $ 6,000 ‐ 6,999 $ 7,000 ‐ 7,999 $ 8,000 ‐ 8,999 $ 9,000 ‐ 9,999 $10,000 ‐ 10,999 $11,000 ‐ 11,999 $12,000 ‐ 12,999 $13,000 ‐ 13,999 $14,000 ‐ 14,999 $15,000 ‐ 15,999 $16,000 ‐ 16,999 $17,000 ‐ 17,999 $18,000 ‐ 18,999 $19,000 ‐ 19,999 $20,000 ‐ 20,999 $21,000 ‐ 21,999 Annual Lease Value (ALV) $600 $850 $1,100 $1,350 $1,600 $1,850 $2,100 $2,350 $2,600 $2,850 $3,100 $3,350 $3,600 $3,850 $4,100 $4,350 $4,600 $4,850 $5,100 $5,350 $5,600 $5,850 Annual Lease Value (ALV) $6,100 $6,350 $6,600 $6,850 $7,250 $7,750 $8,250 $8,750 $9,250 $9,750 $10,250 $10,750 $11,250 $11,750 $12,250 $12,750 $13,250 $13,750 $14,250 $14,750 $15,250 Vehicle Fair Market Value $22,000 ‐ 22,999 $23,000 ‐ 23,999 $24,000 ‐ 24,999 $25,000 ‐ 25,999 $26,000 ‐ 27,999 $28,000 ‐ 29,999 $30,000 ‐ 31,999 $32,000 ‐ 33,999 $34,000 ‐ 35,999 $36,000 ‐ 37,999 $38,000 ‐ 39,999 $40,000 ‐ 41,999 $42,000 ‐ 43,999 $44,000 ‐ 45,999 $46,000 ‐ 47,999 $48,000 ‐ 48,999 $50,000 ‐ 51,999 $52,000 ‐ 53,999 $54,000 ‐ 55,999 $56,000 ‐ 57,999 $58,000 ‐ 60,000 For vehicles with a fair market value in excess of $59,999, the ALV is (.25 x fair market value) plus $500 © 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900 [NAMEOFDEALERSHIP]
DEMONSTRATORVEHICLEPOLICYFORFULLEXCLUSION
Full‐time automobile salespeople at [Name of Dealership] may be provided with the use of a demonstration vehicle. We want you to understand the restrictions on use of demonstration vehicles and how employees who use demonstration vehicles will be taxed on that use. Restrictions on Use of Demonstration Vehicles 1. The demonstration vehicle must be available for‐test drives by customers during the normal working hours of the employee to whom the vehicle is assigned. 2. Personal possessions may not be stored in the vehicle. Any personal possessions must be removed by the beginning of normal working hours. 3. The demonstrator vehicle is provided so that employees can become familiar with the features of the vehicles we sell. Only the employee to whom the vehicle is assigned may use the vehicle outside of normal working hours. It may not be used by family, friends or neighbors. 4. The demonstrator vehicle is part of our inventory and must be available for sale to customers. It may not be used outside the dealership's sales area or for vacation travel. 5. The demonstration vehicle may be used only for tests drives by customers or for other dealer business, for a daily commute between the employee's home and the dealership, and for other limited personal use. Personal use each month is limited to ten miles per day multiplied by the number of days in the month. 6. In order to minimize record keeping, all use during the employee's normal working hours will be treated as business use, and all use outside the employee's normal working hours will be treated as commuting or personal use. 7. The employee must ensure records are maintained and that the mileage on the vehicle at the end of each working day, and at the beginning of the next working day, is properly recorded OR verified by [insert name, title or job description of the person or people responsible for recording or verifying mileage]. 8. [Insert any other restrictions the dealership has concerning use or maintenance of the vehicle.] Tax Treatment of Use of Demonstrator Vehicles I. Any full‐time automobile salesperson who meets all of the above requirements, including limiting personal use to 10 miles per day multiplied by the number of days in the month will not owe any federal or state income tax or any Social Security or Medicare tax on the use of the demonstrator vehicle. II. Any full‐time salesperson who is provided with the use of a demonstration vehicle but does not comply with the restrictions oh storage of personal possessions, use by people other than the employee, use outside the sales area, and vacation travel during a pay period will have the full value of the use of the demonstrator automobile included in wages for the pay period. Income tax, Social Security tax, and Medicare tax on this amount will be withheld from other wages owed to the salesperson. Salesperson's Name ________________________________________________________________ Signature _______________________________________________ Date ___________________
© 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900 [NAMEOFDEALERSHIP]
DEMONSTRATORVEHICLEPOLICYFORPARTIALEXCLUSION
Full‐time automobile salespeople at [Name of Dealership] may be provided with the use of a demonstration vehicle. We want you to understand the restrictions on use of demonstration vehicles and how full‐time salespeople who use demonstration vehicles will be taxed on that use. Restrictions on Use of Demonstration Vehicles 1. The demonstration vehicle must be available for test drives by customers during the normal working hours of the employee to whom the vehicle is assigned. 2. Personal possessions may not be stored in the vehicle. Any personal possessions must be removed by the beginning of normal working hours. 3. The demonstrator vehicle is provided so that employees can become familiar with the features of the vehicles we sell. Only the employee to whom the vehicle is assigned may use the vehicle outside of normal working hours. It may not be used by family, friends or neighbors. 4. The demonstrator vehicle is part of our inventory and must be available for sale to customers. It may not be used for vacation travel. 5. [Insert any other restrictions the dealership has concerning use or maintenance of the vehicle.] Tax Treatment of Use of Demonstrator Vehicles I.
II.
Any full‐time automobile salesperson who meets all of the above requirements will have [between $3 and $21 depending on the value of the demo] dollars per day included in wages for each day on which the salesperson was assigned a demonstrator vehicle. Income tax, Social Security tax and Medicare tax on this amount will be withheld from other wages owed to the salesperson. Any full‐time salesperson that is provided with the use of a demonstration vehicle but does not comply with the restrictions on storage of personal possessions, use by people other than the employee, and vacation travel during a pay period will have the full value of the use of the demonstrator automobile included in wages for the pay period. Income tax, Social Security tax and Medicare tax on this amount will be withheld from other wages owed to the salesperson. Salesperson's Name ________________________________________________________________ Signature _______________________________________________ Date ___________________ © 2013 The Mironov Group, LLC www.mironovgroup.com p 732.572.3900