CAFM Study Guide Reference
FM - Employee Provided Vehicles
NAFA’s Fleet Acquisition and Disposal Guide
B. Employee Provided Vehicles
Introduction
While fleet managers are understandably principally concerned with employer provided
vehicles, employee provided vehicles constitute an important method of providing
transportation in many organizations. Even those organizations that normally provide
vehicles should consider the employee provided option for specific situations. This chapter
provides information about the advantages and disadvantages of offering driver
reimbursement programs and considerations when doing so.
Business Case for Reimbursement Programs
There are circumstances where it is preferable to have employees provide their own
transportation and be reimbursed by the employer. These include:
a.
b.
c.
d.
Temporary or intermittent requirements
Low-mileage drivers
Lack of infrastructure to support an employer provided pool
Strong employee preference
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There are also situations where the provision of vehicles by employees should not be
considered:
a. The type of vehicle required is other than those normally owned by employees. For
example, the requirement for off-road travel or transportation of heavy or over-sized
loads would usually preclude the use of employee provided vehicles.
b. Seeing employees taking the vehicles they use for business home at night would
negatively impact public perception and the image of the organization.
In the circumstances where employee provided vehicles are an option, further exploration of
this option is warranted. Temporary or intermittent requirements can typically be filled with
a rental vehicle, loaner from a pool, or driver reimbursement. The vehicle pool option should
only be selected when there are a sufficient number of employees in one location to make
running a pool cost-effective. Where a critical mass of employees does not exist to fully
utilize pool vehicles, mileage reimbursement is the most common solution used.
Reimbursement for some peak demand may be necessary even when pools are established to
avoid having surplus vehicles depreciating in valuable parking space when not needed.
Low annual official miles driven may also result in reimbursement being the most costeffective option.
Every fleet manager should establish the “break-even”
mileage/kilometers/hours point for his or her fleet vehicles. By using lifecycle cost
techniques explained later in this Guide, the fleet manager can compare the cost of operating
an employer provided vehicle with the cost of reimbursing employees for vehicles they
provide and determine this “break-even” point. As long as the work can be performed in a
typical employee owned vehicle, those drivers who operate a vehicle at less than the “breakeven” amount are good candidates for reimbursement in lieu of having an employer provided
vehicle assigned. See Appendix 1 for one example of a cost comparison between the two
options.
There are some circumstances when reimbursement may be preferred even when it is less
expensive for the employer to provide a vehicle. These situations include:
a. The organization has limited funds available for purchase and does not want to lease
vehicles.
b. Public perception may prevent an organization from allowing employees to commute
with their employer provided vehicles.
c. Parking space or overnight security restrictions may prevent overnight and partial day
storage of the employer’s vehicles. In this case, the employer may opt to eliminate its
fleet vehicles and reimburse employees for the business use of theirs.
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d. Strong employee preference may dictate the use of a reimbursement program as
employees may wish to drive a specific vehicle for comfort or image reasons that are
simply not acceptable for purchase as a fleet vehicle. The reimbursement program
may provide an incentive for that employee to continue working for the organization
without the organization having to make exceptions to policy. In this case
reimbursement should be at a rate equivalent to the cost of an employer provided
vehicle with the employee paying the difference to drive their preferred vehicle
within reasonable guidelines established by the employer.
Other Employer- vs. Employee-Provided Considerations
Other considerations when making the employer versus employee provided decision include
issues of control, asset encumbrance, relative buying power, liability, opportunity for fraud or
abuse, and recruitment impact.
Controlling the type, condition, and appearance of vehicles used for work is certainly within
the employer’s purview when providing vehicles. Vehicles can be marked with logos or
other identifying items to promote company image. Models and color can be standardized to
reflect organizational image. Employee provided vehicles grant more freedom to employees
at the expense of control to the employer. Still, the employer should establish reasonable
guidelines for employee provided vehicles that will be used on the job and at least partially
paid for by organizational funds.
Owning fleet vehicles places these expensive assets on the organizational books. This may
be an advantage or disadvantage depending on the nature of the organization and its financial
goals. Leasing or renting vehicles allows an organization to provide vehicles while creating
an expense rather than assets on the books. Similarly, using reimbursement for employee
provided vehicles keeps them off the organizational books.
Buying power is typically much better for an organization than for an employee.
Organizations can buy or lease vehicles for less, buy fuel, repair parts, and service for less,
and insure for less than their employees. Because of this, an employer who fully reimburses
employees for their business transportation expenses may pay more than if the vehicle was
provided.
Liability is accepted by an organization that provides vehicles. Liability is also assumed
when employees use their own vehicles for official business. An employer must monitor the
driving record of an employee and may be required to monitor the condition of employee
vehicles used on the job. Use of a driver reimbursement program does not absolve an
employer of the requirement for due diligence.
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The potential exists for fraud and abuse whether an employer provides vehicles or reimburses
employees for using their vehicles. Employees driving fleet vehicles may be conducting
personal business not allowed by the fleet policy. Employees who are permitted personal use
may claim fewer personal miles to avoid paying higher taxes on that benefit or avoid
reimbursing the organization for those miles. Employees driving in their own vehicles may
claim more official miles than they actually drive in order to collect more. Vigilance is
necessary whichever method of transportation provision is selected.
Finally, recruitment and retention may be impacted by the choice to provide vehicles or
reimburse for employee provided vehicle use. Requiring an employee to provide a vehicle
may limit the hiring pool if the expense of owning the vehicle is not fully covered by the
reimbursement and there is no other need for the vehicle by the employee. In other cases, a
reimbursement program and freedom to select a vehicle is an incentive for employees when
compared with forcing them into the selected fleet vehicle.
Reimbursement Programs (United States)
Allowance Arrangements
In the United States, vehicle reimbursement programs, sometimes referred to as “advances”
or “allowances”, are all governed by the Accountable Plan Rules developed by the IRS and
found in Publication 463 – Travel, Entertainment, Gift and Car Expenses. Therefore, in
order to fully understand the impact of various vehicle reimbursement programs on both the
organization and the driver, it is important to have a general idea of how Accountable Plans
work.
Since reimbursements paid under Accountable Plans are excluded from gross income and are
not reported on an employee’s W-2, they are usually the most desirable type of program from
both the company’s and driver’s standpoints. Reimbursements paid under a NonAccountable plan are included in an employee’s gross income and must be reported as
compensation on their W-2.
Accountable Plans
So what does it take to have an Accountable Plan? There are three rules that must be
followed.
1. The expenses must have a business connection. Therefore, the driver must be
incurring expenses while performing services as an employee of the employer, and no
payments can be made for a driver’s personal use.
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2. The driver must provide adequate accounting for their expenses within a reasonable
period of time (generally, within 120 days is considered “reasonable”). This is
simply documentary evidence of the expenses supported by a statement, account book
or mileage log, etc. The information generally required is date, place, business
purpose, mileage and amount.
Another way of describing this rule is
“substantiation”.
3. “Excess Payments” must be returned. An excess payment is any payment or advance
that is greater than the expense substantiated by the driver.
Examples of Accountable Plans
1. Flat rate
• Company pays a driver $800 to cover their vehicle expenses
• Driver has $600 in substantiated business expense and returns the excess $200
2. Cents per mile
• Company pays driver at or under the current IRS Optional Standard Mileage Rate
3. Qualifying Fixed and Variable Rate (FAVR) Plans
Non-Accountable Plans
These are plans that do not meet one or more of the criteria required to be a tax-free
reimbursement, with the most common being “flat rate” vehicle reimbursement programs.
Flat rates usually pay drivers a weekly, bi-weekly or monthly amount (for example: $500 per
month) and do not require substantiation of specific vehicle-related expenses. Sometimes
companies will pay a flat rate for fixed expenses and a cents-per-mile rate to cover gas and
other variable expenses.
Example of Non-Accountable Plan:
1. Flat rate
• Company pays a driver $800 to cover their vehicle expenses
• Driver does not substantiate their expense or return any excess funds
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Reporting Vehicle Expenses (Accountable and Non-Accountable Plans)
Plan Type
Employer Reports on W-2
AND employee
reports on 2106
No Amount
No Amount
The excess amount as wages
in box 1
No Amount
Per diem or mileage allowance up to
federal rate. Adequate accounting and
excess returned.
No Amount
All expenses and
reimbursements if
excess expenses are
claimed. Otherwise
form is not filed.
Per diem or mileage allowance up to
the federal rate. Adequate accounting
and excess required but excess is not
returned.
The excess amount as wages
in box 1. Amount up to the
federal rate in box 12 only.
No Amount
Per diem or mileage allowance exceeds
federal rate. Adequate accounting up to
federal rate and excess not returned.
The excess amount as wages
in box 1. Amount up to the
federal rate in box 12 only
All expenses and
reimbursements if
excess expenses are
claimed. Otherwise
form is not filed.
Either adequate accounting or return of
excess, or both, not required by the plan
The entire amount as wages
in box 1
All expenses
No reimbursement plan
The entire amount as wages
in box 1
All expenses
Actual expense reimbursement.
Adequate accounting and excess
returned.
Actual expense reimbursement.
Adequate accounting and excess not
returned.
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Reimbursement Options
Flat Rates
Pros
• Easiest to administer
• Flexible
Cons
• Not tax-free
• Is not geographically sensitive
• Does not account for mileage (depreciation)
• Over-pays low mileage drivers
• Under-pays high mileage drivers
• Provides a disincentive to drive
Discussion
Companies use flat rates when they want a vehicle reimbursement program that is
simple to administer and is under the control of the organization. It is also often the
intent to be “equitable” to drivers by paying them all the same amount.
However, flat rates really tend to miss the mark in the key areas that hallmark a
quality vehicle reimbursement program. While easy to establish and administer, they
do not meet the accountable plan rules and therefore are treated as compensation –
making them taxable income to the driver and subject to taxes for the employer.
While seeming equitable on the surface, they do a poor job paying drivers for their
actual costs because they do not take into account either geography or mileage. Is it
fair for a driver in Philadelphia to receive the same amount as another driver in
Wichita? The answer is clearly “no”, but what makes the “right” amount so difficult
to determine is there are many factors to consider. In this case, insurance, gas,
maintenance and license costs in Philadelphia tend to be higher, yet Wichita has a
pretty hefty personal property tax. Based on 2004 actual costs and assuming 20,000
annual miles, the driver in Philadelphia will incur more than $1,500 in additional cost
each year compared to the driver in Wichita.
Depreciation is the other consideration that flat rates usually do not accurately
calculate.
A driver who puts on 35,000 annual miles has a much different
depreciation structure compared to a driver with only drives 10,000 miles. After
three years the first driver has over 100,000 miles on their vehicle while the second
only has 30,000. Guess whose vehicle is worth more? A high mileage driver needs
to receive a higher reimbursement than a low mileage driver; otherwise they have a
disincentive to drive. Once a driver has “spent” their allowance, all additional costs
are out of their pocket and the last thing a company wants is drivers questioning
whether or not to get in their vehicle and make a sales or service call because it is
costing them money.
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Cents-Per-Mile Programs
Pros
• Easy to administer
• Tax free (if under the IRS Optional Standard Mileage Rate)
• Is a government approved rate
Cons
• Is not geographically sensitive
• Does not properly account for mileage (depreciation)
• Under-pays low mileage drivers
• Over-pays high mileage drivers
• Provides an incentive to report miles
• Lags the marketplace by a year
• Not intended as an accurate reimbursement for business use of a personal vehicle
Discussion
Although companies use many different rates, most stick pretty close to the IRS’s
Optional Standard Mileage Rate for Business (IRS rate), which is updated each year
with a new Revenue Procedure number. Each year the IRS also publishes a series of
Optional Standard Mileage rates that are used for travel related to medical expenses,
charitable activities and relocation.
Somewhere along the line companies have gotten the impression that since the
government publishes this rate, it makes sense to pay it to their drivers. In actuality,
the IRS rate is a safe harbor that can be used by tax payers to deduct un-reimbursed
vehicle expenses in cases where they are not writing-off their actual expenses – a
significantly different application than attempting to pay someone for their business
expense associated with driving their personal vehicle on company business.
The IRS rate suffers from the many of same flaws as flat rates, although has the
distinct advantage of being tax-free. It is easy to administer and explain, and takes
some of the “randomness” out of the reimbursement program. After all, it is
established by the IRS. However, take a look at two drivers who both put on 10,000
miles but, again, one lives in Philadelphia and the other in Wichita. Even though
their costs are significantly different, they each get the same reimbursement.
Because the IRS rate blends together ownership (fixed) and operating (variable) costs,
the fixed costs are not accounted for accurately. For example, license and registration
does not change based on how many miles driven. As a result, at lower annual
mileages, the IRS rate underpays drivers and at higher mileages, since it keeps paying
for fixed costs that have already been properly accounted for, it overpays drivers.
Using the 2004 rate of 37.5¢ per mile, if the intention of your reimbursement program
is to accurately pay for the costs of driving a personally owned vehicle on company
business, then your 5,000 mile a year driver would get $1,875 and your 50,000 mile a
year road warrior would get $18,750. Neither amount is close to their actual costs.
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The other reality about using the IRS rate is the temptation to over-report miles. At
$1.12 for every three miles driven, a few extra miles here and there can really add up
and cost the company a fair sum of money.
Fixed and Variable Rate Allowance (FAVR)
Pros
• Can be paid tax-free
• Accurately calculates the cost of vehicle ownership and operation
• Accounts for geography
• Accounts for mileage
• Uses current costs
Cons
• Takes administrative support
• Drivers must adhere to the FAVR guidelines
Discussion
Without a doubt, FAVR (Fixed and Variable Rate) plans offer the best opportunity
for an organization to set up a fair and defensible reimbursement program for their
drivers. The payments are tax-free, can exceed the IRS rate (if supported by the data)
and account for both geography and mileage. However, the IRS has established a
number of guidelines that must be followed by both the company and the driver in
order to have a compliant program.
First, the IRS sets the following four criteria for all FAVR programs.
1.
2.
3.
4.
Performance of services as an employee of an employer
Data derived from the base locality
Reflects retail prices
Reasonable and statistically defensible in approximating actual expenses that
the employee would incur as owners of the standard automobile.
Obviously, a FAVR plan can only be paid to employees of the organization, thereby
excluding other individuals such as family members. The data used to calculate the
reimbursements, such as insurance rates, costs of license and registration, gas prices,
maintenance, must all be gathered in the areas where drivers live and drive, and must
be based on retail prices, thereby reflecting the costs that drivers actually pay. Lastly,
there must be a methodology behind the reimbursements that is statistically
defensible and results in reimbursements that approximate the actual expenses that
the driver would experience.
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Once the data has been gathered it must be paid to drivers as both fixed and variable
payments, so that there is none of the over- or under-payments that occur with either a
flat rate program or a straight cents-per-mile program. Fixed payments must be made
at least quarterly, but most companies will make their payments in sync with their
normal payroll cycle – such as monthly, weekly, 1st and 15th, etc. Variable payments
are made for each business mile driven and submitted by the driver.
Fixed payments cover such costs as:
• Insurance
• Depreciation
• Registration
• License
• Personal property taxes
Variable payments cover the costs of:
• Gas
• Oil
• Maintenance
• Tires
Program parameters
To set up a FAVR allowance, the organization must establish the parameters that they
will use in their plan. To start, they must choose a “base vehicle” from which
reimbursements will be calculated. This base vehicle is usually representative of the type
of vehicle that the employee would be expected to drive based on their job function and
title. For example, it’s common for companies to use vehicles such as the Ford Taurus or
Dodge Intrepid for their sales force. Companies may also set up “tiered” FAVR
programs, using other vehicles as appropriate for differing groups of employees.
Once the vehicles are selected and accessorized, they are priced using the IRS formula of
95% of dealer invoice plus sales tax and then used as the basis for all reimbursement
calculations. The maximum price that can be used in a FAVR plan is $28,100 for 2004
and is adjusted each year. Therefore, luxury vehicles are excluded from FAVR plans, but
since most senior executives receive vehicles as compensation and don’t tend to drive
significant numbers of business miles, this is rarely an issue. Executive programs can
still be set-up using a fixed and variable format, but may be partially or fully taxable.
The vehicles prices in FAVR plans are updated each year and reimbursements adjusted to
reflect any increases.
Other parameters that need to be decided upon include the level of insurance that the
driver should carry, length of the retention period, and type of fuel, as well as if there are
any “special driving circumstances” that need to be factored in, such as off-road driving.
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Depreciation
The depreciation component of a FAVR plan is subject to § 280F limitations, however, if
it exceeds those limits, you may compare the total fixed and operating payment to 80% of
the annual business mileage multiplied by the standard mileage rate and remain tax free.
The employer must report the depreciation component paid to the employee at year’s end.
To calculate the depreciation component of a FAVR plan, the payer must determine the
residual value of the base vehicle. The depreciation component therefore becomes:
Depreciation = Price of Vehicle – Residual value
If researched data is unavailable, a company may use the IRS safe harbors for the residual
value. They are:
Retention Period
2 year
3 year
4 year
Residual Value
70%
60%
50%
Retention Period (Cycle)
The retention period is the time in calendar years selected by the employer during which
they expect the employee to drive a standard automobile, not to be less than 2 years. The
term of the retention period and the retention mileage (annual mileage multiplied by the
number of calendar years in the retention period) are used to come up with what is termed
the “retention cycle” or “depreciation cycle”. Examples of retention cycles include; 3
year/60,000 miles, 3 year/90,000 miles, 4 year/80,000 miles, etc.
The mileage portion of the retention cycle is based on the individual driver’s annual
mileage and should be adjusted periodically based on actual reported mileage as well as
the organization’s knowledge of projected driving experience (changes in territory, etc.)
Business Use Percent
The business use percent is calculated by dividing the annual business mileage by the
annual total mileage. The business use may not exceed 75%; however, it is important to
note that this cap only applies to the fixed cost payment. Why a cap at 75%? Fixed costs
are different in that, in many ways, they are time related. Your license and registration
costs don’t change based on the number of miles driven and likewise for tax, title, and
insurance.
Most companies are comfortable with paying for the business use of these types of items
by looking at the percentage of time involved. A very common business use percentage
in FAVR plans is 71.4% - based on 5 days out of 7. Weekends are then considered
personal time and are not covered under the plan. If you want to go a little above the
5/7ths approach, you can go up to the IRS limit of 75%.
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Companies can also set the business use percentage above 75%, but the amount of
payment that exceeds 75% may be subject to taxation if the total payment made to the
driver (both fixed and variable) exceeds the calculation of the drivers business mileage
multiplied by the current IRS rate on a quarterly basis.
The following are safe harbors set by the IRS for establishing the business use percent in
a FAVR plan:
Annual Business Mileage
6,250-10,000
10,001-15,000
15,001-20,000
21,001 and above
Business Use Percent
45%
55%
65%
75%
FAVR Allowance Limitations
In order to have a FAVR program, both the company and driver must follow the
guidelines set by the IRS. These guidelines help the company control one of the most
common misconceptions of FAVR plans, namely that employees can drive beat-up older
model vehicles. As a result, drivers have safe, reliable vehicles and companies have
employees in vehicles that project the proper image. Guidelines include:
•
•
•
•
•
•
•
Participants must drive 5,000 business miles to qualify for a FAVR plan.
There must be at least five employees covered by FAVR programs. There could be
three FAVR plans in place for the five drivers.
A FAVR allowance may not be paid to a control employee, such as a major
shareholder (1% or more of total stock), board appointed officer, director or board
member.
Management employees may not make up a majority of the employees covered by a
FAVR program. This refers to executive management, not such positions as Sales
or District Managers.
A FAVR allowance may be paid only with respect to an automobile that costs,
when new, at least 90% of the standard automobile cost used in determining the
FAVR allowance for the first calendar year the employee receives the allowance
with respect to that automobile. Drivers may purchase used vehicles and pay less
than 90% of the standard automobile cost as long as the vehicle price was within
90% when new.
The model year of the vehicle driven must not differ from the current calendar year
by more than the number of years in the retention period. This means that an
employee who purchases a 2004 vehicle, reimbursed from a program based upon a
4-year retention cycle, may operate that vehicle up to December 31, 2008 (2004
plus four years).
The driver’s insurance coverage must be at least equal to the insurance limits used
to compute his/her reimbursement.
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•
•
A FAVR allowance may not be paid with respect to an automobile for which the
employee has claimed depreciation using a method other than straight-line, such as
accelerated depreciation.
The vehicle can be owned or leased by the employee.
Employee Reporting
The following must be provided to the employer within 30 days after a driver is added to
the program:
•
•
•
•
•
The make, model and year of the vehicle
Written proof of insurance coverage limits
The odometer reading of the vehicle
The purchase price (if owned) or the capitalized cost (if leased) of the vehicle
Type of depreciation claimed, if any
Reimbursement Programs (Canada)
Reimbursement plans in Canada are similar to those described above. As such the
advantages and disadvantage described apply. There are, however, some differences in the
way Canada Revenue Agency (CRA) treats the allowance payments compared to the United
States. For example, the rules applied by the IRS for FAVR plans in the United States do not
exist in Canada. It should also be noted that Quebec residents file two separate returns, one
federal and one provincial, while residents of all other provinces and territories file a single
combined return with CRA.
Income Tax Paid by Employees
CRA publication T4044 Employment Expenses outlines the rules for income reporting where
an employee receives a car allowance or reimbursement for business travel. As described
above, employees may receive a car allowance in three different ways: a flat rate per week,
month or year plus a fixed rate per kilometer, or either one of these without the other. Only a
reimbursement paid per kilometer is exempt from being included in income. Any flat rate
based on time, or a flat rate combined with a per-kilometer rate must be reported as income.
In this case, an employee may deduct allowable motor vehicle expenses including capital
cost allowance.
The types of expenses that may be deducted include:
•
•
•
•
•
•
•
Fuel and oil
Maintenance and repairs
Insurance
License and registration fees
Capital cost allowance (depreciation)
Eligible interest paid on a loan used to buy a motor vehicle
Eligible leasing costs
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CRA expects detailed records and receipts to be available in the event of an audit. This
includes a daily logbook detailing all business use of the vehicle. If a vehicle is used for both
employment and personal use, only the percentage of the expenses related to job use can be
deducted.
There are limitations on the amounts that may be deducted to prevent taxpayers from
completely writing off the costs of luxury vehicles as a deductible expense. These limits
apply to interest expense, the capital cost of the vehicle if owned, and to lease payments for a
leased vehicle. The limits are usually revised every year so it is a good practice to have the
latest version of CRA publication T4044 available.
There is a prescribed method for calculating depreciation, called “capital cost allowance” or
CCA. A taxpayer may not deduct the entire cost of a motor vehicle in a single year as it has
an economic life spanning several years. The maximum allowable deduction is 30% of the
un-depreciated cost, which means the deduction will become smaller in subsequent years for
the same vehicle.
Some special provisions to be aware of include the “50% rule”, which states that if a vehicle
is acquired or disposed of in a given year then only half of the CCA may be claimed.
Presumably the taxpayer will be also calculating CCA on the second vehicle as well so the
net impact from putting the two deductions together is minimized. There is also a limit on the
allowable purchase price including taxes. If the motor vehicle purchase price exceeds the
limit, CCA can only be deducted on the limit, not the actual purchase price.
There is a rebate available for Goods and Services Tax/ Harmonized Sales Tax (GST/HST)
paid on the allowable automobile expenses. The rebate claim is usually filed with the tax
return for the year in which deductions are made, but may be claimed up to four years after
the expense was incurred.
Regulations for Employers
When an employee claims a deduction for automobile expenses, the CRA requires that a
joint declaration signed by both the employer and the employee be kept for audit purposes.
This is a CRA form that contains language stating that the employee paid his or her own
expenses for a motor vehicle as a condition of employment. For more information, consult
Interpretation Bulletin IT-522, Vehicle, Travel and Sales Expenses of Employees.
Like the IRS, the CRA publishes a rate each year, which is the maximum rate per-kilometer
that a business can reimburse to an employee and claim 100% of the payment as a deductible
expense. This does not prohibit an employer from paying a higher rate, but the amount paid
in excess of the limit is not a deductible expense. These rates are usually updated in
December each year by the Department of Finance.
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Employers are required to withhold income tax at source on any reimbursement paid that is
not based solely on kilometers driven. This clearly can make a huge difference in the amount
of money the employee actually has to make loan or lease payments and pay for gas and
repairs. An employer paying taxable car allowances can request permission from the CRA to
reduce the tax withheld by the amount of the employee’s allowable expenses, so the
employee’s additional tax payable is reduced or eliminated. Each employee is required to
give the employer an estimate of the allowable expenses at the beginning of the year, to be
retained by the employer for examination by the CRA. Employees may find that using form
T777 Statement of Employment Expenses to be useful for calculating their estimated
expenses.
Employees in Québec are required to send one copy of this calculation to the Ministère du
Revenu with form TP-1016 (Demande de réduction de la retenue d’impôt). The Ministère
du Revenu approves each application individually. The process takes about eight weeks to
complete.
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