RE: REPORTING COMPANY CAR USE BY CONTROL EMPLOYEES. Dear Sir or Madam:

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1 RE: REPORTING COMPANY CAR USE BY CONTROL EMPLOYEES Dear Sir or Madam: This memorandum reviews the valuation and taxable income reporting rules for a control employee such as a director, one percent or more owner, an officer earning more than $105,000 in compensation or an employee earning more than $215,000 for 2016, driving a company car valued at more than $15,900 when first put in use in 2016, ($15,300 in 2011 and $15,900 in 2012 and $16,000 in 2013, 2014, and 2015). You have to include the value of your personal use of a company car in your gross income less any reimbursement for personal use you pay the company. The amount of gross income depends on the valuation rule elected. There are four valuation rules: (1) a general valuation rule; (2) the automobile lease valuation rule; (3) the cents-per-mile valuation rule (not available for cars valued at more than the amounts set out above; and (4) the commuting valuation rule (not available to control employees set out above). For such control employees driving a company car, the value of which was in excess of the amounts set out above, only the general valuation or automobile lease valuation rule may be used to determine gross income from use of a company car. ADOPTION OF AUTOMOBILE LEASE VALUATION RULE Under IRS Regulations, submission by you of the attached Worksheet will permit use of the automobile lease valuation rule by you and the corporation in the event of first use of a company car in the current year. You may always elect to use the general valuation rule, even if the corporation does not. However, you may use the automobile lease valuation rule only if that rule has been elected by the corporation when the company car was first made available to you. GENERAL VALUATION RULE Under the general valuation rule, your taxable income for the use of a company car equals the cost of an arm's-length lease of a comparable car on comparable terms in the same geographic area, multiplied by your percentage of personal use based on mileage. In addition, the value of company-provided insurance, maintenance, fuel or other related benefits, must be included in the value of the availability of the car under the general valuation rule. 1

2 AUTOMOBILE LEASE VALUATION RULE The automobile lease valuation rule involves use of an annual lease value ( ALV ). See the Worksheet attached. To calculate the amount to be included in income under this method, the corporation must: (1) determine the fair market value of the car as of the first date that the car was made available for your personal use; (2) select the ALV that corresponds with that fair market value; (3) reduce the ALV to reflect periods of unavailability, if any; (4) add the value of all of the services provided in connection with the car, except insurance and maintenance; and (5) multiply the ALV, as adjusted, by the percentage of personal use based on mileage you provide to the corporation. The fair market value of a company car for this rule is the purchase price (including sales taxes, title fees, and other charges in connection with the purchase) that a person would have to pay in an arm's-length transaction. For a purchased car, the cost (plus taxes, title, etc.) may be used. For a car leased after 1988, the safe harbor value is either the manufacturer's suggested retail price (plus taxes, title, etc.) less 8%; the manufacturer's invoice price (including options) plus 4%; or the price reported by a nationally recognized pricing guide. The ALV, once determined, must continue to be used until December 31 of the fourth full calendar year after the date that the automobile lease valuation rule was applied, unless the car is transferred to another employee. Thereafter, if still in use, the fair market value is re-determined on January 1 for the succeeding four-year period to arrive at the new ALV. The ALV includes the cost of company-provided maintenance and insurance. If such costs are not provided, the ALV may not be reduced to reflect such expenses. All of the company-provided services in connection with the car, including the provision or reimbursement of fuel expenses, must be added to the ALV in determining the taxable amount of the benefit provided. Company-paid fuel may be valued at either its fair market value based on all the facts and circumstances or 5.5 cents per mile for all miles driven by you. For 2016, qualified transportation fringe benefits excludable from taxable wages include employerprovided parking of up to $255 a month. Amounts paid exceeding the monthly $255 limit are taxable as wages and have to be reported as wages in Box 1 of Form W-2 and have federal income and FICA, FUTA and Medicare taxes withheld and remitted. For 2016, the requirement for exclusion that the parking be provided in addition to, and not in lieu of, compensation otherwise payable, has been eliminated. Massachusetts follows the inflation adjustment formula allowed under the January 1, 2005, Code. As a result, the Massachusetts exclusion amount for the tax year 2016 is $255 per month for employer-provided parking. RULES FOR SUBSTANTIATION You must substantiate each element of an expenditure or use by adequate records or by sufficient evidence corroborating your own statement. The statute contemplates that you will maintain and produce such substantiation as it will constitute proof of each expenditure or use. Written evidence has considerably more probative value than oral evidence only. In addition, the probative value of written evidence is greater the closer in time it relates to the expenditure or use. A contemporaneous log is not required (though it can be a good idea), but a record of the elements of an expenditure or of a business use made at or near the time of the expenditure or use, supported by sufficient documentary evidence, has a high degree of credibility not present with respect to a statement prepared subsequent thereto when generally there is a lack of accurate recall. To meet the adequate records requirement you should maintain an account book, diary, log, statement of expense, trip sheets, or similar records, and documentary evidence which, in combination, are sufficient to establish each element of an expenditure or use. 2

3 For purposes of substantiating the business use, the company may rely on adequate records maintained by you or on your own statement on the Worksheet attached if corroborated by other sufficient evidence. Either the company must retain a copy of the adequate records maintained by you or the other sufficient evidence, if available, or the company may rely on a statement submitted by you that provides sufficient information to allow the company to determine the business use. If the company relies on your statement, the company must retain only a copy of the Worksheet attached. You must retain a copy of the adequate records or other evidence. REPORTING AND WITHHOLDING RULES The company, as a result of providing you with a car, is required to: (1) report the value of your personal use of the car as income on your Form W-2 (either aggregated with other income or on a separate W-2); and unless you elect not to withhold, (2) withhold income tax on the value of the personal use of the company car using a flat twenty-five percent federal tax rate and the appropriate state tax rate or the normal withholding method; and (3) withhold and pay employment tax (FICA, FUTA and Medicare tax), if applicable, on the value of the personal use of the company car. Failure by the company to report such use will result in a $50 penalty for each failure up to a maximum of $100,000. In preparing your Form W-2 the company must include the value of the personal use for the calendar year in Box 1 for wages and, if applicable, Box 3 for social security (FICA) wages and Box 5 for Medicare wages. However, the use of Form W-2, Box 12, Benefits included in box 1, will be optional. Employers must continue to report the lease value of a vehicle provided to an employee either in Box 12 or in a separate statement to the employee. Withholding income tax on the value of the use of a company car is not required if the value of the personal use of the car is included on your Form W-2 and you acknowledge notification on the Worksheet attached. To determine the taxable income attributable to personal use of your company car please fill out the attached Worksheet and return it to me before next January 15. If you have any questions, please call me. Sincerely, Treasurer 3

4 Worksheet for Computing Additional Compensation Resulting From Personal Use of a Company Car Date Employee's Name The following must be answered by the employee: 1/ Total miles driven during the year. miles 2/ Personal use miles (including commuting miles). miles 3/ Percentage of personal use (2 divided by 1 above). % 4/ Do records or evidence exist to justify the business deduction? yes/no If yes, is the evidence written? yes/no 5/ What was FMV of car on January 1st of year your use began? $ 6/ I understand no income tax withholding will be applied. initial ELIGIBLE ALTERNATIVE VALUATION METHODS I. Annual Lease Value - method available to any employee. Determine annual lease value for FMV of car at #5 above using table on reverse side. $ X X 1/12 X = Annual lease Business Personal (A) Value months in use use % X 5.5 cents = + = $ Personal (B) (A) Additional Miles Compensation II. Facts and Circumstances Method - available to any employee. Burden of proof rests with employee. Cost to rent comparable car (1) Total cost (Add 1,2,3, & 4) (5) Insurance (2) Personal use percentage (6) Maintenance (3) Fuel (4) Additional compensation (5 x 6) $ SUMMARY Additional compensation to include on employee's Form W-2 is $. Additional Social Security and Medicare tax needed to be withheld from employee's salary if Social Security wage base of $118,500 in Medicare has no wage cap and the rate is 2.35% if the employee s wages for the year exceed $200,000 (1.45% if below $200,000). X 6.20% = $ Additional Compensation Social Security Rate X 2.35% (or 1.45%) = $ Additional Compensation Medicare Rate 4

5 Appendix A - Annual Lease Value Table (1) Automobile FMV (2) Annual Lease $0 to 999 $ 600 1,000 to 1, ,000 to 2,999 1,100 3,000 to 3,999 1,350 4,000 to 4,999 1,600 5,000 to 5,999 1,850 6,000 to 6,999 2,100 7,000 to 7,999 2,350 8,000 to 8,999 2,600 9,000 to 9,999 2,850 10,000 to 10,999 3,100 11,000 to 11,999 3,350 12,000 to 12,999 3,600 13,000 to 13,999 3,850 14,000 to 14,999 4,100 15,000 to 15,999 4,350 16,000 to 16,999 4,600 17,000 to 17,999 4,850 18,000 to 18,999 5,100 19,000 to 19,999 5,350 20,000 to 20,999 5,600 21,000 to 21,999 5,850 22,000 to 22,999 6,100 23,000 to 23,999 6,350 24,000 to 24,999 6,600 25,000 to 25,999 6,850 26,000 to 27,999 7,250 28,000 to 29,999 7,750 30,000 to 31,999 8,250 32,000 to 33,999 8,750 34,000 to 35,999 9,250 36,000 to 37,999 9,750 38,000 to 39,999 10,250 40,000 to 41,999 10,750 42,000 to 43,999 11,250 44,000 to 45,999 11,750 46,000 to 47,999 12,250 48,000 to 49,999 12,750 50,000 to 51,999 13,250 52,000 to 53,999 13,750 54,000 to 55,999 14,250 56,000 to 57,999 14,750 58,000 to 59,999 15,250 For vehicles having a fair market value in excess of $59,999, the annual lease value is equal to: (.25 X the fair market value of the car) + $500. 5