The Department of the Treasury and the Internal Revenue Service recently issued final regulations (TD 10043) that amend the substantiation requirements under Section 274 of the Internal Revenue Code (IRC). Aimed primarily at governmental units and emergency responders, these regulations expand the definition of qualified nonpersonal use vehicles to include unmarked vehicles used by firefighters, rescue squads, and ambulance crews. For tax professionals, understanding the interaction between the statutory framework, the prior regulations, and these new modifications is critical for advising municipal clients and individual first responders on working condition fringe benefit exclusions and substantiation relief.

Statutory Framework and Prior Regulations

Under IRC Section 162(a), taxpayers are generally allowed a deduction for ordinary and necessary business expenses. However, IRC Section 274 imposes strict limitations and substantiation requirements on certain expenditures. Specifically, IRC Section 274(d) provides that no deduction or credit shall be allowed for any listed property, which includes passenger automobiles, "unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel... [and] (C) the business purpose of the expense".

A critical statutory carve-out exists within IRC Section 274(d), which explicitly states: "This subsection shall not apply to any qualified nonpersonal use vehicle (as defined in subsection (i))". IRC Section 274(i) defines a qualified nonpersonal use vehicle as "any vehicle which, by reason of its nature, is not likely to be used more than a de minimis amount for personal purposes".

Prior to this revision, Treasury Regulation § 1.274-5(k)(2)(ii) provided an exclusive list of vehicles that met this statutory definition. That list included "Clearly marked police, fire, and public safety officer vehicles" and "Unmarked vehicles used by law enforcement officers... if the use is officially authorized". The prior regulations defined marked vehicles as those where "through painted insignia or words, it is readily apparent that the vehicle is a police, fire, or public safety officer vehicle". Consequently, the prior regulations "did not include unmarked vehicles used by firefighters, members of rescue squads, or ambulance crews in the definition of qualified nonpersonal use vehicles".

Reasons for the Modifications

The rationale for modernizing the regulations stems from evolving safety concerns for emergency personnel. Historically, emergency responders were provided with marked vehicles. However, the IRS and Treasury Department noted 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".

Allowing these responders to use unmarked vehicles permits those who are required to be on call at all times to "travel inconspicuously, thereby reducing risk of harassment and vandalism". Furthermore, these vehicles are "typically... specially outfitted with onboard equipment, which is used by firefighters and emergency personnel to suppress fires, conduct rescue activities, or provide emergency medical services". Because the vehicles are heavily modified for emergency response, the Treasury concluded that "any personal use of these vehicles is likely to be minimal," making the new exception "consistent with the underlying intent of section 274(i)".

Technical Modifications to the Regulations

To effectuate this change, the final regulations make several specific modifications to 26 CFR Part 1:

Addition to the List of Excepted Vehicles

The final regulations amend Reg. § 1.274-5(k)(2)(ii) by redesignating the catch-all provision to paragraph (T) and adding a new Reg. § 1.274-5(k)(2)(ii)(S), which explicitly includes "Unmarked firefighter, rescue squad, or ambulance crew vehicles (as defined in paragraph (k)(7) of this section)".

Definition and Use Requirements

The regulations add a new Reg. § 1.274-5(k)(7) to formally define the parameters of the exception. Under Reg. § 1.274-5(k)(7)(i), the substantiation requirements do not apply if the unmarked vehicle is "required to be used for commuting by the firefighter or member of a rescue squad or ambulance crew, who, when not on a regular shift, is on call at all times". Crucially, "Personal use (other than commuting) of the vehicle outside the firefighter’s or rescue squad or ambulance crew member’s obligation to respond to an emergency must be prohibited by the governmental unit".

Vehicle Specifications

Reg. § 1.274-5(k)(7)(ii) defines the vehicle itself as one owned or leased by a governmental unit that is "specially outfitted to allow firefighters or members of rescue squads and ambulance crews to travel safely and efficiently to the scene of an emergency". This includes onboard equipment such as "lights and sirens, medical emergency equipment, life-saving devices such as defibrillators, and radios" as well as personal protective equipment and emergency oxygen tanks. The regulation clarifies that "A license plate marking or insignia does not disqualify a vehicle from being an unmarked firefighter, rescue squad, or ambulance crew vehicle".

Conforming Amendments

The final regulations also amend Reg. § 1.132-5(h)(1) to update cross-references, substituting "§ 1.274-5(k)(3) through (9)" in place of the previous citations, ensuring that the working condition fringe benefit rules harmonize with the new substantiation exceptions.

Application of the New Rules and Example

To illustrate the practical application of these modifications, the IRS added Example 5, found at Reg. § 1.274-5(k)(9)(v).

In the example, an "Emergency medical technician, X, is a member of a rescue squad employed by City M". X is provided with an unmarked vehicle equipped with sirens and medical equipment and is on call during off-shift hours. X is required to commute in the vehicle, and the city’s official policy "prohibits personal use (other than commuting) of the vehicles outside the city limits". The example notes that X uses the vehicle "only for commuting, personal errands while commuting, and personal errands within City M".

Because this use conforms to the strict prohibitions and definitions outlined in Reg. § 1.274-5(k)(7), the regulations conclude: "Therefore, the value of that use is excluded from X’s gross income as a working condition fringe and the vehicle is not subject to the substantiation requirements of section 274(d)".

Impact on Taxpayers

The primary taxpayers affected by these final regulations are the "governmental units that provide firefighter or rescue squad or ambulance crew member employees with unmarked qualified nonpersonal use vehicles and the employees who use those vehicles". For the employees, the impact is highly favorable: the use of these vehicles is excluded from gross income as a working condition fringe benefit, removing the burden of meticulously logging mileage for commuting or de minimis personal errands. For the governmental employers, the rule does not "affect employment tax reporting or require any additional substantiation". Instead, it relieves them of an administrative burden without creating "any new or different requirements on small entities" or adding "any economic burden to affected entities".

Effective Dates

Tax professionals should note that these administrative reprieves are available immediately. The Treasury explicitly stated that "These final regulations are effective on March 20, 2026". Furthermore, the applicability date under Reg. § 1.274-5(m) is updated to reflect that the rules of paragraphs (k)(2)(ii)(S), (k)(7) and (k)(9)(v) "apply to taxable years ending on or after March 20, 2026". References to Reg. § 1.274-5(k)(9) within the fringe benefit rules of Reg. § 1.132-5(h) are similarly applicable as of March 20, 2026.

Prepared with assistance from NotebookLM.