In the complex construction world – commercial or residential – quite a bit of driving is needed to get the job done. For most enterprises, new projects unfold daily, and because of all the nuts and bolts required to complete a contract, efficiency and cost-effectiveness ought to be seen as intertwined. Yet, amid the hustle and bustle of site operations, one critical aspect often overlooked is selecting the right vehicle reimbursement program. The choice between fleet, Tax-Free Car Allowances (TFCA), Fixed and Variable Rate (FAVR) programs, and basic Cents per Mile reimbursements can significantly influence your construction business’s profitability and employee satisfaction. This blog will delve deep into the intricacies of these four primary vehicle program types, providing the knowledge needed to confidently decide the best route for your construction enterprise, whether it operates in the residential or commercial sector.
When evaluating vehicle programs for your construction business, it’s crucial to assess your specific operational needs. Fleet programs emerge as the go-to solution when construction projects require specialized vehicles, such as tractors, backhoes, or cranes. These heavy-duty machines are the backbone of your operations, and having them readily available is paramount to completing projects on time and within budget.
Fleet programs offer some advantages:
- Equipment Accessibility: With a fleet program, you can immediately access a dedicated pool of specialty vehicles. This minimizes downtime and ensures that your projects progress smoothly.
- Maintenance and Repairs: Maintenance and repair costs are often covered under fleet programs, reducing the financial burden on your construction business.
- Operational Efficiency: The availability of specialized equipment allows your team to focus on their tasks rather than wasting time searching for, renting, or maintaining vehicles.
While fleet programs are undoubtedly advantageous for construction companies that heavily rely on specialized vehicles, it’s important to note that they may not be the most cost-effective choice for businesses with more diverse transportation needs. Therefore, carefully considering your specific requirements is essential when deciding whether a fleet program aligns with your construction enterprise’s objectives.
Comparing Fleet Costs to Reimbursement Programs
While fleets may be helpful if you need specialty vehicles, vehicle reimbursement programs are usually better for running a vehicle program involving standard cars and light trucks.
- Leased Fleet Cost for 50 Vehicles: $780,000 per Year
- Mileage Reimbursement Program Cost for 50 Vehicles: $390,000 per Year
In this example, vehicle reimbursement proves to be 50% more cost-effective than maintaining a fleet. Several factors contribute to this significant cost differential:
- Elimination of Personal Use Discrepancies: Vehicle reimbursement programs are predicated on the business use percentage, often 71.4% of vehicle mileage (calculated as 5/7 weekdays of business use). This eliminates discrepancies related to personal use.
- No Mileage Band Discrepancies: Unlike fleets, which may charge for a set number of miles per year, mileage reimbursement programs adhere to the actual business use percentage, preventing overpayment for personal mileage.
- Insurance Costs: Fleet programs often cover 100% of insurance costs, which can be notably expensive, whereas reimbursement programs allocate insurance costs based on actual business usage.
- Additional Hidden Costs: Fleet programs can entail hidden expenses such as reconditioning and transfer costs when transitioning vehicles to new employees and idle time costs.
Case Study: Annual Cost of a Single Fleet Vehicle
- Fleet Vehicle Program Cost per Year (e.g., Jeep Cherokees): $14,000 per Car
However, this cost is often misrepresented by fleet management companies (FMCs) by focusing on the total mileage of the vehicle rather than the business use percentage. The actual price, factoring in the business use, amounts to 71¢ per mile per car—5.5¢ more expensive than the IRS standard rate.
Understanding Fleet Management Companies (FMCs)
Companies often need to outsource fleet management to FMCs due to the administrative complexity and time-consuming nature of managing a fleet. FMCs procure and manage vehicles, handle maintenance, and sometimes provide insurance.
Corporate Risk and Fleet Insurance
Companies running fleets assume the risk of accidents, which can be financially burdensome. They often need to organize their own insurance policies to mitigate these risks, including commercial insurance, which can be significantly costlier than personal car insurance.
Business Use Percentages (BUPs)
Compared to reimbursement programs like FAVR, with a BUP of 71.4%, fleets are often billed as if the BUP is 100%, resulting in higher costs. Reimbursement programs acknowledge that employees use their personal vehicles for work only on specific days.
Personal Use Chargebacks
The need for standardization in fleet car usage for personal purposes leads to varying chargeback policies. Many employees underreport personal use, resulting in a lower reported average, typically 8-12%, when the actual personal use can be higher. This discrepancy can result in more significant tax burdens for employers, as they should ideally chargeback 28.6% to accurately account for personal use.
In conclusion, vehicle reimbursement programs like FAVR offer significant cost savings, greater transparency in expense allocation, and adherence to actual business use, making them a compelling alternative to traditional fleets.
Mileage Reimbursement (The IRS Rate)
If you operate as a contractor rather than an employee within the construction industry, you can claim the IRS mileage rate for business-related mileage expenses. This program enables you to recover some driving costs by deducting the IRS-approved rate on your taxes. Here’s how the mileage reimbursement (IRS rate) program works:
- Independent Contractor Status: This program is particularly suitable for independent contractors conducting business for various contractors or companies. It allows you to recoup some of your expenses related to business travel.
- Recordkeeping: To ensure accurate reimbursement, it’s imperative to maintain meticulous records of your mileage. A detailed log of your business-related travel is essential to maximize your deductions.
- Tax Deductions: When filing your taxes, you can deduct the IRS-approved mileage rate for the distance you’ve traveled for business purposes. This can result in substantial tax savings.
- Simplicity: The IRS rate is straightforward. It doesn’t involve complex calculations or compliance issues, making it a convenient option for independent contractors.
Car allowance programs come into play when your employees use their vehicles for work-related tasks. However, This seemingly convenient solution has a significant drawback: taxable income. This means that a portion of your employees’ reimbursement is subject to taxation, resulting in a substantial financial loss for them. Herein lies a clear recommendation: Never use a car allowance when more advantageous alternatives are readily available.
The tax implications of car allowance can lead to a considerable reduction in your employees’ take-home pay. By opting for this program, you’re causing your workforce to unnecessarily lose approximately 30% of their hard-earned money to taxes. This affects your employees’ financial well-being and negatively impacts your business as an employer.
Fixed and Variable Rate (FAVR) Reimbursement Programs
Fixed and Variable Rate (FAVR) programs offer a tax-free solution for businesses whose employees use personal vehicles for work-related purposes. FAVR combines fixed and variable rates in its reimbursement structure. Employees receive a fixed monthly allowance and a variable rate per mile driven for business purposes.
This dual-rate approach accounts for predictable fixed and fluctuating variable costs, resulting in a more accurate reimbursement system. FAVR programs eliminate the need for company-owned vehicle fleets. Instead, employees use their personal vehicles for work-related tasks, allowing businesses to maintain operations while reducing administrative complexities and costs associated with fleet management.
FAVR addresses the fairness issue often associated with standard mileage reimbursement programs like Cents per Mile (CPM). CPM programs use a fixed rate per mile, typically based on the IRS standard mileage rate. However, this rate may not accurately reflect employees’ diverse expenses for business driving.
FAVR also allows employers to calculate rates based on geographic regions, considering factors such as local fuel prices and repair costs. This geographic specificity ensures employees are reimbursed at speeds appropriate to their location, promoting fairness across diverse regions. To calculate FAVR reimbursement rates, employers must conduct market research to determine the actual costs associated with driving in specific regions. These costs include fixed expenses like depreciation, insurance, registration and variable expenses like fuel, maintenance, and repairs. By considering local factors, FAVR ensures that reimbursements are fair and reflect the true cost of business driving.
Key benefits of FAVR programs include:
- Tax Advantages: FAVR programs are structured to comply with tax regulations, ensuring employers and employees receive the full reimbursement benefits without incurring additional taxes.
- Transparency: FAVR programs offer transparency in reimbursement calculations, fostering trust between employers and employees regarding reimbursements.
- Compliance: FAVR programs are designed to meet tax compliance standards, reducing the risk of legal complications for your construction business.
When you want to provide fair and tax-free reimbursements for your staff’s business mileage, FAVR is the most logical choice. It benefits your employees and demonstrates your commitment to reimbursement practices within your construction enterprise.
In the construction industry, making informed decisions about vehicle programs – be they fleet or reimbursement-based – is more critical than ever. These ample choices can significantly impact not only operational efficiency and financial health but also the well-being and satisfaction of your employees. By selecting the appropriate program tailored to your needs, you can minimize unnecessary costs and ensure that your employees are fairly reimbursed for their business-related driving expenses.
- Use fleet programs only when you require specialized vehicles for your construction projects.
- Avoid car allowance due to its tax implications, which can significantly reduce your employees’ take-home pay.
- Consider FAVR for tax-free and efficient employee reimbursement for business mileage.
- Opt for mileage reimbursement (IRS rate) when operating as a contractor or sales rep who undertakes occasional trips, ensuring you keep accurate records for tax deductions.
By following these guidelines, you’ll make well-informed choices that contribute to your construction business’s overall success and financial health. Staying ahead often starts with the proper vehicle program selection in the ever-evolving construction landscape.
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, 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.