In the world of business operations, it has become increasingly common for employees to use their vehicles for work-related endeavors. As companies navigate these unique arrangements, two prevalent methods for managing the expenses of company drivers often come into play: Fixed and Variable Rate (FAVR) reimbursement plans and fleet vehicle programs. Central to each is the role of business use percentages (BUP) in determining the appropriate reimbursement for employees’ business-related vehicle expenses. This article delves into the intricacies of business use percentages. It delves into a comprehensive comparison between the FAVR and fleet reimbursement approaches, shedding light on the factors that impact their effectiveness and suitability for modern businesses.
What is a business use percentage?
Business use percentage refers to the amount of time an employee’s car is utilized for business purposes, as opposed to personal driving. It measures the proportion of the vehicle’s usage dedicated to work-related tasks. For instance, let’s consider an example where an employee has a business use percentage of 71.4%. This means the employee drives their vehicle for work-related tasks on 5 out of 7 weekdays. Whether they rely heavily on their car to go to client meetings, visit project sites, or conduct other job-related activities, these all constitute business use tasks. At the same time, the percentage leaves room for personal use during weekends and other designated off-duty periods.
Customization is key
Keep in mind, however, that 5 out of 7 weekdays is just an example and a good baseline – in FAVR programs, the business use percentage can be customized to align with specific company requirements. Indeed, different organizations may have varying demands and operational needs that impact the frequency of employee vehicle usage for work-related tasks. Some companies may require a higher business use percentage if their employees spend a substantial amount of time on the road, while others with more stagnant office-based duties may have a lower rate. By aligning the percentage with the organization’s specific needs, employers can ensure that employees are fairly compensated for the costs incurred while using their vehicles for work-related purposes.
Business use percent and FAVR
The FAVR approach determines the reimbursement amount based on fixed and variable rates, with the business use percentage influencing the calculation. A higher business use percentage leads to a higher reimbursement, as a more significant proportion of the vehicle’s usage is allocated to business-related tasks.
The impact of the business use percentage on reimbursement highlights the significance of accurately determining and tracking the usage of personal vehicles for business tasks. This can be achieved through various methods, such as mileage tracking apps or manual recording of business mileage, though the former is certainly more efficient and reliable. In any case, employers must have a clear and transparent system to document and verify the business use percentage, ensuring that the amount paid aligns with using personal vehicles for work-related activities.
How is FAVR different from the fleet?
- Fleet: In a fleet arrangement, employers provide company vehicles for employee use. This means that employees have access to a designated fleet of cars owned and maintained by the employer. If these vehicles are taken home and used for personal purposes, the employee must effectively reimburse the employer for the personal use, or this percent of the vehicle’s use will be assessed as regular income, that is, it will be assessed for income and payroll tax.
Additionally, fleet-based systems often impose personal-use chargebacks on employees. Employees who use the company vehicle for personal purposes must reimburse the employer. Chargebacks are intended to recover the costs associated with private uses of the company vehicle. This can lead to additional administrative complexity and may create dissatisfaction among employees.
- FAVR: This model takes a different approach by leveraging employees’ personal vehicles for work-related purposes. Instead of providing company vehicles, employers reimburse employees for using their cars based on fixed and variable rates. This covers employees’ costs in utilizing their vehicles for business tasks, such as fuel, maintenance, insurance, and depreciation. In this system, employees are responsible for providing the upfront fees of their cars, including purchase or lease payments, and they are reimbursed.
FAVR eliminates the need for chargebacks. Instead of reimbursing employees for the overall usage of their vehicles, employers specifically cover them for the business use of their cars. This approach simplifies the process and ensures that employees are only reimbursed for the portion of vehicle usage directly related to their work responsibilities.
The FAVR and fleet reimbursement approaches have distinct differences in vehicle ownership, cost allocation, and reimbursement methods. On the one hand, the fleet model provides company vehicles and covers all associated costs, it shoulders more responsibility and risk onto the employer and potentially higher fees on their workers. Indeed, chargebacks are quite risky – if one is charged consistently for using a fleet or company car off the clock, this supposed benefit in kind isn’t so kind after all. On the other hand, the FAVR model relies on employees’ cars and reimburses them based on fixed and variable rates, using precise software-backed and IRS-compliant calculations that account for distinctions between business and personal uses for the car, avoiding employee disputes from the getgo.
Understanding the concept of business use percentage is crucial when implementing reimbursement systems such as FAVR or fleet. This percentage directly impacts employees’ reimbursement for using their vehicles for work-related tasks. By considering the differences between the FAVR and fleet approaches, businesses can effectively make informed decisions on managing and compensating employees for their vehicle usage.
Factors such as cost allocation, administrative complexity, and employee satisfaction play significant roles in determining which method aligns best with their specific needs and priorities. By cautiously evaluating these factors and understanding the implications of business use percentage, companies can implement a reimbursement system that optimizes cost control, streamlines processes and ensures fair reimbursements for employees’ business-related vehicle expenses.
Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants or agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.