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The IRS and Your Company’s Business Vehicle Program

Headshot of a man with a blurred background By Ben Reiland June 18, 2019

Categories: Industry Trends Mobile Workforce Vehicle Reimbursement

How the IRS Impacts Your Company’s Vehicle Program

Companies generally think of visits from the IRS the same way people think of being served a subpoena. Whether it’s the possibility of an audit, or just … well, anything to do with an audit, not complying with IRS guidelines can be risky. And your vehicle program could be risking it all. How does this work? Well, it depends on what vehicle program you have.

Car Allowances and IRS Publication 463

Generally, car allowances, also known as flat car allowances, are taxable. This is because they don’t meet the IRS standards required to identify as reimbursement for business related travel. IRS Publication 463 sets these standards out.

If a company complies with the standards set out in IRS Publication 463—recorded business mileage, start and end locations among other things—the program can qualify as an accountable allowance. With an accountable allowance, companies must follow guidelines that include:

  • expenses must have a clear business connection
  • they must be submitted in a timely manner
  • any excess must be returned in a similarly timely period

Mileage Reimbursement and the IRS Standard Mileage Rate

Companies that use a mileage reimbursement, or a cents-per-mile (CPM), program, pay their drivers cents per each mile they drive their personal vehicle for business reasons. Many businesses like this program because it’s easy to implement and can be non-taxable, as long as they use the Standard Mileage Rate the IRS determines each year.

But a company still faces the risk of an audit if employees don’t properly complete or even lose their mileage logs. What’s more, the IRS does not recommend reimbursing at the IRS Standard Mileage Rate, but below it.

Company Provided Vehicles and ASC 842

Businesses with company provided vehicle programs avoid the same attention from the IRS because there isn’t a monthly reimbursement that could be considered income. Employees that benefit from company leased or owned vehicles don’t need to worry about driving their personal vehicle for work. Companies still have to worry about ASC 842.

The lease accounting rule, passed in 2016, closed the loop hole that allowed companies to keep operating leases off their balance sheets. Private companies have until December 15th of 2019 to comply with ASC 842. Public companies not yet in compliance had until December 15th of 2018.

FAVR and Revenue Procedure 2010-51

Companies use the Fixed and Variable Rate (FAVR) Reimbursement program to more accurately account for the regional costs of vehicle upkeep and operation specific to the driver’s location. The IRS breaks these down by fixed costs—insurance premiums, license and registration fees, taxes and depreciation— and variable costs—gas, oil, maintenance, tires. While the IRS determines this similarly to the Standard Mileage Rate, it is more fair and accurate to individual mobile workers.

As long as businesses hold to the process outlined in Revenue Procedure 2010-51, or work with a company manages this for them, their mobile workers will receive a tax-free reimbursement.

Avoid Unnecessary IRS Concerns

Your company might not have everything about its vehicle program in order. Whether your current program isn’t looking great or it’s just a few steps from the right track, we can help. Contact us to find out how we can help your company and mobile workforce.

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