While a fleet or company car program has been a popular option, more companies are beginning to realize there are better programs to consider. Whether the search for a new reimbursement program is for cost savings, reducing administrative tasks, or something else, there are strong alternatives to fleet.
A common move is to car allowance, but is it the best choice?
Your company has a fleet. You’re getting tired of personal use piling up, out of control fuel spend and employees not treating cars well. Maybe you have some doubts about accounting for those vehicle expenses yourself? Or maybe you have a suspicion that company cars for your sales reps aren’t the lowest cost option? So, you’re looking for fleet alternatives.
When looking for a fleet alternative, you probably read about a car allowance program or someone told you about theirs. From what you picked up, it seemed super simple—simpler than your fleet program—and easy to run. All driving employees receive the same amount each month. Plus, no cars on the balance sheet anymore! So what’s better: a car allowance or a company car? The answer is neither.
Car allowances may save you some hassle in program administration. However, no one informed you of the downsides of a car allowance program. And there are some doozies.
Your team on the road wants to drive something that fits their lifestyle. They don’t want cookie-cutter used cars. Sure, they want something that gets them where they’re going. But they also want something that provides a good environment to get their work done.
Here’s more from Iain Morris, who talks about his life on the road as an outside sales rep for electrical goods and equipment supplier, Rexel U.S.A.
And for you? There are a lot of other factors to consider. With a company car program, those cars are going to be sitting ducks on your balance sheet. In fact, with ASC 842 already in effect, the shift on leases being recognized as capital instead of operating means a lot of new things to report on and measure. An alternative to fleet could help alleviate this extra work. Do your employees really need a company car? Or could they still do their job driving their personal vehicle?
An allowance may seem like the easiest thing when you’re tired of the fleet costs, maintenance, and time it takes to support. Ahh, one payment a month and you’re done? Doesn’t that sound like a dream? Unfortunately, a dream is all it is.
First, a car allowance doesn’t appropriately compensate employees. Some mobile workers might put in a month of business miles and have some stipend left over. Others won’t be so lucky.
Second, because car allowances don’t substantiate mileage, the IRS considers them additional income. That makes each stipend taxable. Employers pay more and employees receive less. In 2021, car allowances created about $2,712 in annual tax waste per employee.
Third, when gas prices are too high for a car allowance to cover business mileage, companies will give drivers fuel cards. This might seem like a good idea. But it’s a short-term solution that creates bigger problems. Companies with fleets have no visibility into fuel spend. Companies with car allowances adopting fuel cards are in no better position.
With these large challenges, suddenly the easy way out doesn’t seem so easy.
What if I told you there was a way you could have a low-maintenance program where your company reimburses your team the right amount for what they’re driving? Not just a random number that someone at your company picked out of the blue. No, this number would include all the costs that go into driving. A number in someone’s area, based on how much they drive and the type of vehicle they need to do their job.
Don’t believe it? Hear how Neil Beier, VP of Finance at Crescent Crown Distributing, made the switch from paying merchandisers and sales reps a fixed rate without tracking miles to a fair reimbursement for the use of their cars.
A fixed and variable rate (FAVR) program is the only IRS-recommended reimbursement method and when administered properly, is tax-free. On average, companies that switch from fleet to FAVR can save about 35% on their vehicle reimbursements.
Now that we’ve established fleet programs are expensive and car allowances create tax waste, let’s talk about FAVR.A lot of companies we work with choose a Fixed and Variable Rate (FAVR) mileage reimbursement program for their drivers who put in over 5,000 business miles a year. For businesses with a passenger fleet for their sales reps, 5,000 business miles a year for one driver may sound crazy low.
A Fixed and Variable Rate program is a personalized mileage reimbursement program based on where your team lives and drives for work. You’d be reimbursing your team for fixed costs like insurance premiums, license and registration fees, taxes and depreciation. And variable costs like gas, oil, vehicle maintenance and tire wear.
It’s common for a company’s workforce to span multiple states. Employees living in New York City have higher insurance premiums and gas prices compared to their coworker who lives in Montana. Their vehicle reimbursement should account for those differences. FAVR does.
When an employee drives more one month, their reimbursement increases to match the additional miles. When gas prices increase, their reimbursement adjusts as well. That sounds fair, right?
Learn more about FAVR and the benefits it can bring to your company and employees.