Lauren A. Carnes Partner, CPA, MST
9 June 2017
It has been many years since the Internal Revenue Service traveled
around New England and audited dealers for demo reporting. In
2001, numerous dealerships were assessed hundreds of thousands
of dollars of payroll taxes for non-reporting of demo usage. NADA,
OCD and other automotive firms worked closely with the Internal
Revenue Service to develop simplified reporting procedures-
Revenue Procedure 2001-56 to clarify the issue of demo reporting that both the dealer and the IRS could live with.
Here is a brief synopsis of the Methods:
Full Exclusion Method – Available to Full/Time Salespersons Only
- Full – Exclusion from income for demo use by a full–time salesperson
requires a high standard of record keeping to be maintained
to exclude this personal use.
- Dealer must have a qualified written policy limiting demo use
and must communicate that policy to its salespersons. A model
written policy for the full exclusion method is provided in the
- Requires daily out/in log entries and monthly testing (must begin
by the later of the first reporting period in February or date
the full-time salesperson is provided with a demo).
- Limited personal use is defined as average of 10 miles per day
over and above the daily commute.
- Independent dealer monitoring required.
Partial Exclusion Method – Available to Full/Time Salespersons Only
- Partial Exclusion – from income for demo use by a full–time salesperson is computed as follows:
• Dealer must have a qualified, written policy limiting demo
use and must communicate that policy to its salespersons.
It need not contain a limitation on the salespersons’
personal use (other than prohibitions on use by others,
vacation trips, and storage of personal possessions
For payroll reporting, the dealer must include a certain
amount that reflects the salespersons’ non-deductible
personal use in the salespersons’ income at least monthly.
The remaining use is deemed to represent excludible
• One method to determine the salesperson’s nondeductible use is the
“Annual Average Look Back Method.” Dealer determines the average
sales price of all new vehicles sold in the prior year. This is
accomplished by adding the sales price of all new vehicles (cars and
light duty trucks) sold the prior year and dividing it by the number sold.
• The average sales price is then plugged into a table (reproduced below)
to determine the amount to be included in the salespersons’ income. The
average sales price must be determined in January and applied no later
than February of each year.
Table A: Daily Inclusion Amount Under the Partial Exclusion Method
- Dealer with an average sales price between $15,000 and $29,999 would include $1801 in the monthly income of the salesperson.
- Dealer with an average sales price between $30,000 and $44,999 would include $2701 in the monthly income of the salesperson.
- Both these amounts are based on a 30-day month.
- Used vehicles may not be part of this calculation. Their average sales price is separately determined in the same manner and may only be applied to salespersons driving only used cars as demos. Dealer has the option of using the new vehicle average sales price as the average sales price for all vehicles (new and used).
- Dealer with multiple franchises may compute the average sales price on a franchise-to-franchise basis to determine the amount to be included in its salespersons’ income, provided salespersons are only provided demos from a single franchise and this is applied to all salespersons in the dealership.
- Dealer must maintain certain records related to this method – this requirement will generally be satisfied by records currently maintained in the ordinary course of business such as factory financial statements and payroll records. Salespersons are not required to maintain any records. Full Inclusion ALVT Method – Available to Any Dealership Employee (Including Dealer Principals and Co-Owners)
- Full inclusion in income for demo use by both salespeople and non–sales persons using the Annual Lease Value Table
- Payroll Reporting – To reduce recordkeeping for employees
who are not full-time salespersons (and therefore do not qualify
for the full or partial exclusion optional methods), dealer may
include in the employee’s income each month the full value of
the demo with no reduction for business use.
- The amount to be included in income each month is the greater
of $3/day or the pro rata portion of the Annual Lease Value
Table (ALVT) using the value of the demo. The demo value
may be determined by using the “Annual Average Look Back”
method (see description above under Partial Exclusion Method).
If you have demos and they are being driven off the lot by your
employees and managers, some type of reporting is required and
should be done. Please review and consider giving us a call to get
you into compliance.