Can a Company Buy a Car for an Employee?

Providing transportation support for employees is a common corporate practice, particularly in roles that involve frequent travel. While the idea of purchasing a car outright for an employee might appear straightforward, there are complex cost, tax, and compliance implications. Rather than outright vehicle ownership, many companies are shifting to more flexible and tax-efficient alternatives: Vehicle Reimbursement Programs (VRPs) like Fixed and Variable Rate (FAVR) plans.

The Cost Dynamics of Company-Owned Vehicles

Buying and maintaining a vehicle on behalf of an employee may seem generous, but it entails significant financial obligations. The cost structure includes not only the purchase price but also ongoing expenses such as insurance, maintenance, fuel, and depreciation. For example, company-owned fleets have been shown to be approximately 30% more expensive than FAVR reimbursement programs due to added expenses like personal use chargebacks, downtime, and administrative overhead.

Fleets also demand considerable internal resources to manage logistics, repairs, insurance claims, and compliance documentation. This administrative burden makes them a less agile solution, particularly for companies with expanding or fluctuating travel needs.

Liability and Risk Management

Providing an employee with a company-owned car can expose the employer to increased liability. Accidents that occur during personal use of a company vehicle often remain the legal and financial responsibility of the employer, leading to potentially high insurance costs and legal exposure.

In contrast, reimbursement models like FAVR shift ownership to the employee. This setup keeps the liability with the driver’s personal insurance provider, with companies verifying proper coverage and topping off where necessary. Such arrangements significantly reduce corporate liability while maintaining employee mobility.

FAVR: A Flexible and Tax-Free Solution

FAVR (Fixed and Variable Rate) reimbursement programs provide a more sustainable and tax-efficient method for supporting employee transportation. Under this IRS-compliant structure, companies reimburse employees for both fixed costs (insurance, registration, depreciation) and variable costs (fuel, maintenance, tires) of vehicle ownership, all while adhering to specific criteria that keep the reimbursement tax-free.

To qualify for FAVR, companies must have at least five drivers using their vehicles for over 5,000 business miles annually. The vehicle must be within a cost range set by the IRS ($61,200 for 2025) and meet additional requirements for age and coverage. Employees can choose their own vehicles, which provides them autonomy while ensuring they meet company standards for business use.

Comparing Reimbursement Models

Another common vehicle benefit is the cents-per-mile (CPM) model, where employees are reimbursed at a standard IRS rate—70 cents per mile in 2025. While simple to administer, CPM may result in inequitable outcomes: high-mileage drivers may be overpaid, while low-mileage employees could end up undercompensated.

FAVR, by contrast, adapts reimbursements based on both geography and actual expenses, aligning more closely with real costs. It also offers up to 30% cost savings over flat-rate allowances or fleet models and is 100% tax-free when structured correctly.

The Tax Perspective

From a tax compliance standpoint, purchasing a car for an employee is treated as a fringe benefit by the IRS. Unless the vehicle is used solely for business and thoroughly documented, the value of the car may be considered taxable income to the employee. This introduces complex tracking requirements and potential payroll tax implications.

Accountable reimbursement plans such as FAVR eliminate these complications by requiring employees to document business mileage and expenses. When done properly, reimbursements remain non-taxable for both employer and employee, streamlining year-end tax reporting.

Strategic and Operational Flexibility

Providing company-owned vehicles may seem attractive for control or branding purposes, but this rigidity comes at a cost. Fleets can’t be easily scaled down during downturns or expanded without significant capital. Reimbursement programs, however, allow businesses to flex vehicle benefits in real-time by adjusting payments or eligibility based on employee roles and mileage bands.

Companies adopting hybrid approaches—mixing FAVR for high-mileage employees with CPM for lower-mileage ones—gain additional flexibility and fairness in administering benefits. This setup allows organizations to remain responsive to operational demands without the overhead of managing a physical fleet.

Employee Satisfaction and Choice

While being assigned a company car may seem like a perk, employees often prefer owning or leasing their own vehicles. This preference allows for personal choice in make, model, and usage without restrictions often imposed by fleet policies. Reimbursement programs respect this autonomy while ensuring that employees are not out-of-pocket for business-related expenses.

Moreover, reimbursement models like FAVR align compensation with the actual cost of doing business, creating equitable treatment across employees in different regions or vehicle markets. This is especially important given the rising costs of fuel, maintenance, and insurance due to inflationary pressures.

Insurance Considerations

Commercial vehicle insurance for fleets often comes at double the cost of personal vehicle insurance. Employers providing cars must carry higher coverage limits and face steeper premiums due to liability risk and potential for non-business use.

Conversely, under reimbursement programs, employees are responsible for insuring their vehicles, typically under business-use endorsements. Employers can verify coverage levels and supplement where necessary, ensuring both protection and cost control without assuming primary liability.

Technology Integration and Compliance

Modern vehicle reimbursement programs are bolstered by technology that automates mileage tracking, generates IRS-compliant reports, and facilitates reimbursement processing. Apps like Cardata Mobile help drivers log trips with minimal manual input, ensuring accurate records while reducing administrative tasks for employers.

These tools also enable financial teams to analyze spending, identify inefficiencies, and adjust reimbursement policies to align with evolving IRS rates and corporate budgets.

Conclusion

While buying a car for an employee is technically feasible, it is rarely the most cost-effective or tax-efficient solution for modern organizations. Fleet ownership ties up capital, introduces compliance complexities, and increases liability. In contrast, structured vehicle reimbursement programs—particularly FAVR—offer flexibility, significant cost savings, and tax advantages.

By choosing reimbursement over ownership, companies empower employees, streamline operations, and align vehicle benefits with strategic goals. Rather than placing a car in every driveway, the smarter route lies in paying only for what’s driven—fairly, efficiently, and compliantly.