Substantiation exception offered for unmarked emergency vehicles

The IRS recently released proposed regulations (REG-106595-22) providing an exception for unmarked vehicles used by firefighters or members of a rescue squad or ambulance crew from the heightened substantiation requirements of Section 274(d).

The proposed regulations add these unmarked vehicles as a new type of qualified nonpersonal use vehicle, which is a category generally excepted from the Section 274(d) substantiation requirements that apply to certain listed property, as defined in Section 280F(d)(4). This proposed addition would effectively qualify the use of such unmarked vehicles for the Section 132(d) working condition fringe income inclusion exception.

Under Section 274(d), a taxpayer is not allowed a deduction for certain expenses unless they are substantiated by adequate records or by sufficient evidence corroborating the amount, time and place, business purposes of the expenditure, and the business relationship to the taxpayer of the person receiving the benefit. Section 274(i) excepts “qualified nonpersonal use vehicles” from this 4-pronged substantiation requirement. This includes any vehicle which, by reason of its nature, is not likely to be used more than a de minimis amount for personal purposes.

As provided by the proposed regulations, both the business and personal use of an employer-provided vehicle that is a qualified nonpersonal use vehicle under Section 274(i) qualifies under Section 132(d) as a working condition fringe benefit that is excluded from the employee's income.

In the preamble to the proposed regs, the IRS mentions that firefighters and rescue squad and ambulance crew members were historically provided with vehicles that had markings to indicate their status as emergency response vehicles. However, the IRS has recently become aware that some governmental units are assigning these emergency responders unmarked vehicles due to increased incidents of harassment of first responders and vandalism of clearly marked fire and emergency vehicles and equipment.