Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

e includable in the recipient’s gross income unless it is excludable by a specific statutory
provision. In the case of automobiles provided by a dealer, one of the following may be
applicable: no additional cost services, defined in IRC section 132(b); qualified employee
discounts, defined in IRC section 132(c); and working condition fringes, defined in IRC
section 132(d).
1. Qualified Employee Discounts
The amount of any discount provided to an employee on the purchase of an automobile from
the dealer is excludable from the employee’s gross income to the extent the rules of IRC
section 132(c) are satisfied. The exclusion applies whether the property or service is provided
at no charge or a reduced price or whether the benefit is provided through a partial or total
cash rebate. Only that portion of the discount that falls within the guidelines is excludable
from income. Any discount in excess of that amount must be included in the employee’s
income.
The maximum excludable discount that an employee can receive on an automobile is the
dealer’s gross profit percentage on that automobile multiplied by the price at which it is
offered to non-employee customers. See IRC section 132(c)(2)(A) and (B). For purposes of
this rule, an "employee" includes current employees, spouses of employees, and dependent
children of employees, etc. See Treas. Reg. section 1.132-1(b)(1). Accordingly, discounts
provided to non-employee shareholders and directors are not excludable from gross income
under this rule.
2. Working Condition Fringes
a. General Rule
Subject to the special rules for qualified automobile demonstration use and product testing
below, an employee’s use of an employer-provided automobile is excludable from gross
income as a working condition fringe only to the extent the following three requirements
are met:
1) the employee’s use of the automobile relates to the dealer’s trade or business;
2) the employee would have been entitled to a deduction for a business expense or for
depreciation (IRC sections 162 or 167) if he or she had purchased the automobile that
was provided by the employer; and
3) the business use of the automobile must be substantiated by adequate records under
the substantiation requirements of IRC section 274(d). See Treas. Reg.
section 1.132-5(c).
See Treas. Reg. section 1.132-5(b).
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