by Mike Bassi, Director of Partnerships, Runzheimer
While there is still a short window of time for individuals to file and close out on last year’s taxes, for most companies, tax season is already in the rearview mirror. An often overlooked way to reduce employer taxes is within the business vehicle programs. By using this year’s tax season as a time to reevaluate, businesses can implement sound policies and programs to ensure the organization and the employee are in the best position come tax time next year.
There are multiple options when it comes to business vehicle programs, but each comes with its own unique set of implications. Depending on the needs and objectives of a company, the factors surrounding taxes could be an advantage or disadvantage.
For some business vehicle programs, like flat allowances, reimbursements are reported as taxable income which increases the total payroll tax withholdings and decreases an employee’s take-home amount. At large companies where drivers’ business mileage and travel territories differ significantly, a fixed and variable rate (FAVR) program is more accurate and may be the recommended option.
In addition to being tax-free, FAVR programs take into account the varying geographies of drivers and creates a tailored reimbursement rate. Qualifying for this type of tax-free reimbursement program requires an in-depth understanding of IRS and administrative requirements as well as accurate mileage capture to create valuable tax advantages.
Factors like driving habits and organizational needs should be considered when selecting a business vehicle program. With pros and cons to both taxable and tax-exempt programs, taking time to evaluate each program will prove to be financially responsible in the long term. Here are three reimbursement programs and their accompanying tax implications:
A flat allowance is the simplest business vehicle program option, but is likely to add the largest tax burden to an organization and its employees. For example, a company consisting of 100 drivers, with an allowance of $800 monthly per driver, can waste up to $364,800 in taxes alone.
Since allowances are usually considered income, they can be subject to payroll taxes, leaving the employee with reduced earnings. Organizations would need to add almost 30% to the allowance in order to make up the difference.
For corporations with drivers who are dispersed around the country, a flat allowance plan can create large geographical discrepancies. For example, the cost differential on a standard insurance policy between Detroit and Atlanta can be up to $4,000.
The business driver in Atlanta would be over-reimbursed because of his or her low insurance costs, while the driver in Detroit, where it is more expensive to own and operate a vehicle for business, would be under-reimbursed.
A cents-per-mile program reimburses drivers with a tailored internal rate or the IRS standard deduction rate. Nearly 80% of businesses use this type of program for some portion of their driving workforce. CPM is well-suited for individuals who are on the road less than 5,000 miles annually.
CPM programs require in-depth and accurate business mileage logs to acquire tax-free status. Employees have to capture and record all business mileage data, including the trip’s start and end points, time, date, and business reason for travel, with the employer being obligated to keep these logs for 7 years.
While much of the reporting responsibility is on the driver, the audit risk lies in the hands of the employer. Inaccurate online tools and tedious manual recordkeeping can lead to companies overspending on reimbursements by more than 15%.
The IRS safe harbor rate, the typical rate used for a CPM program, is based on national averages and can lead to large reimbursement discrepancies within an organization. Similar to a flat allowance program, CPM programs can under-reimburse a driver in expensive markets like Los Angeles or New York City, and over-reimburse drivers in less costly markets like Nashville or Louisville.
Fixed and Variable Rate (FAVR)
FAVR programs are dynamic and customizable. Due to the varying costs across geographies, FAVR programs reimburse for the fixed cost of a vehicle, like depreciation and taxes, as well as variable costs like fuel and maintenance.
In addition to being sensitive to local costs, FAVR programs can also be tax-free for both businesses and employees, making it a premium option for many organizations. In order to be tax-advantaged, businesses need to meet IRS requirements which includes having five or more drivers who drive at least 5,000 miles annually.
While FAVR programs offer more accurate benefits compared to allowance plans, the expenses can also be significantly lower. Since FAVR programs take regional costs into consideration for both the fixed and variable rates, organizations can save up to $3,000 per driver. With FAVR, employers can control costs around a specific vehicle cost standard, and still pay rates for each participant based on their unique circumstances like business miles driven annually, local costs, and more.
Just as each organization is different, so are business vehicle programs. It’s important for decision-makers to look closely at the benefits and drawbacks of each option and align them with their organization’s driving and reimbursement needs. Understanding the impact of a selected program can improve the bottom line and make sure employees are receiving a fair and accurate reimbursement. While tax season can be filled with stressors, re-evaluating the previous year’s expenses can serve as the foundation for an informed decision moving forward.
|Mike Bassi is the director of partnerships at Runzheimer, and he’s been with the organization for nearly 20 years. Bassi provides expert policy consulting and proven technology solutions to partner organizations with a mobile workforce. He helps businesses expand their reach of field intelligence and analytics.|