Every time the fiscal year or tax year ends, executive attention turns to expenses. Many organizations recognize that their fleet vehicle or company car program is one area where there’s opportunity for reducing operational costs or taxes, maybe both. New companies or companies considering adding a vehicle reimbursement program (VRP) are in the same position. The dilemma becomes deciding which type of vehicle reimbursement program will enable you to report greater ROI to shareholders and less obligation to the IRS.
On the plus side, you have options – and you’ll have us to help sort through them! Let’s get started.
Company-Owned Vehicle, the “Company Car”
In this classic approach, the company buys the vehicle, covers all costs and assumes all risk involved. It’s the most expensive option. It’s also a branding opportunity for some companies. However, when it comes to providing company cars to sales representatives or employees who drive as part of their role, the car goes home with them, which adds risk and cost.
• The organization can control the image of the company by controlling the type of vehicle operated by their employees.
• Employees see company-provided vehicles as a benefit.
• Using a fleet service card may offer discounts for maintenance and fuel expenses.
• It’s the most expensive program.
• It’s high-risk. The company is liable for damages occurring during personal use and when an unauthorized driver is behind the wheel. The employer pays for business-related and personal use costs.
• It requires a significant outflow of cash. Where else could you use that money to grow business?
Obviously, the only difference between owning and leasing is which company has the asset on their books. Leasing is the second-most expensive option, so that’s one advantage for the company.
• Employees can see this option as a benefit.
• The organization retains brand image control.
• Some companies charge employees a Personal Use Charge, which reduces the total tax paid.
• It’s the second-most expensive program. The employer pays for business-related and personal use costs.
• It’s high-risk. The company is liable for damages occurring during personal use and when an unauthorized driver is behind the wheel.
• There’s added risk due fluctuating value of leased vehicles.
• Leases account for a significant amount of company resources that affect the bottom line.
Flat Monthly Payments, an “Allowance”
With flat monthly payment programs, the employee provides their own vehicle and is granted a monthly allowance. Allowances are easy to administer, one of the greatest advantages. However, a flat rate allowance is all taxable money because it doesn’t reimburse based upon business miles, or the expenses in the employee’s region. And, when an employee’s expenses near or exceed the allowance, they are inclined not to drive, which is bad for business.
• Easy administration.
• Employee assumes risk when not using the vehicle for business.
• Payments tend to favor the company.
• Allowances typically don’t account for regional variations in taxes, gas prices, and other associated charges.
• Payments are subject to employment taxes for employers and employees.
• Doesn’t acknowledge the difference in costs for a driver who travels 500 miles and one who travels 3,000 miles; under- and over-compensation are implicit.
Flat Rate Plus a Fuel Card
The only difference from a Flat Rate (Monthly Allowance) Plan, is that the employer adds exposure by providing a fuel card and, sometimes, paying maintenance expenses. The employee owns the car and is responsible for the depreciation, financing, title, licensing, and insurance.
• The employee retains the equity in the vehicle, since they own it.
• Employees can see getting the card to be a benefit.
• The fuel card is an easy way to track fuel expenses.
• Fuel cards create fraud risk and cybersecurity exposure.
• It’s difficult to set a flat monthly rate that accounts for adjustments for regional expenses variable expenses
• The flat rates are subject to employment taxes.
• Determining fuel card use for employee’s personal driving vs. business driving can be difficult. You can’t press “pause” on a gas tank.
Cents Per Mile
The IRS Standard Rate is commonly used to reimburse employees for occasional business mileage. Often called “Cents-per-Mile” reimbursement, it’s also known as “driving for dollars.” A Cents-per-Mile program makes sense when an employee uses their vehicle only occasionally for work. Otherwise, it’s just not accurate because it doesn’t factor in the differences in the cost of living when employees are spread across the U.S. – it’s easy to overpay and underpay drivers.
• It’s recognized as a non-taxable method of reimbursement.
• It’s very easy to administer and understand.
• This method can be exceedingly expensive for a force of regular drivers.
• If a driver has low annual miles, this model typically underpays the driver. At higher mileages, this model overpays.
Fixed & Variable Reimbursement
As the most recognized of the company car programs, fixed and variable reimbursement (FAVR) is supported by the IRS through Rev Proc 2010-51 and Publication 463. A FAVR program separates vehicle reimbursement into two distinct categories:
• Fixed Expenses – Costs that do not vary from month-to-month such as licensing, depreciation and insurance, calculated based on the vehicle location.
• Variable Expenses – Everything else that contributes to the cost of operating the vehicle, including fuel, maintenance and actual miles driven while on the job.
At the end of each month, known recurring costs are combined with the changing expenses drivers incur doing their jobs.
• It’s a non-taxable, IRS-compliant program that benefits drivers and the company.
• It’s flexible. Drivers choose the vehicle they prefer and are compensated relevant to a vehicle profile.
• Employees own the vehicle and realize its equity.
• It factors in regional variations for all expenses, so it’s fair for both parties.
• Companies pay only for business miles and time.
• While there aren’t many negative aspects to a FAVR plan, we can’t say it’s always the best choice until we know the company situation.
We’re Here to Help
We’re confident that what we’ve explained is a good starting point, but also understand that every business has unique needs to be considered when making what is a very important business decision. When you are ready to explore your options further, get in touch. With decades of experience evaluating programs and serving a very diverse spectrum of customer’s, we’ll be happy to work through everything from the basic program to customized services designed to cut costs, lower your risk and simplify your tailored vehicle reimbursement program.
About Cardata: Cardata provides vehicle reimbursement programs for the mobile workforce. CarDdta services save money, reduce risk, and remove administration. Cardata programs are compliant with the IRS and the CRA.
MEDIA Contact: Megan Dean
Marketing & Sales Specialist | Cardata
Direct: 303-434-3307 | FAX: 929-235-7525