With many employees needing to drive for meetings, site visits, inspections, and more, it’s important for companies to come up with a way to organize and manage work travel. Generally employers will compensate their driving employees either by providing a company vehicle, or by having them use their personal cars for work and offering some type of allowance or reimbursement for business expenses.
There’s a wide range of options available — each one has their own set of benefits and drawbacks. It’s also important to be aware that some programs are entirely taxable, while some allow for the possibility of tax savings (and can even be tax-free). With this in mind, it’s well worth it to look into all of the possibilities available for your business to ensure that you’re choosing the one that truly offers the best benefits.
Comparing company vehicles and vehicle allowances
A company vehicle program is when an employer provides vehicles for their employees who need to drive for work purposes. It’s up to the company to own or lease the vehicles, and the company is also responsible for costs and maintenance associated with the vehicles, including gas, insurance, repairs, and more.
A vehicle allowance is entirely different — requiring the employee to provide and use their own personal vehicle. In this scenario, employees are responsible for the responsibilities and costs that come with that vehicle. A vehicle allowance is when the employer provides a set payment to compensate for business use of the personal vehicle. The allowance is usually given at regular intervals and can be used by the employee towards expenses like gas, repairs, maintenance, and more.
What are the pros and cons of company vehicles?
One of the main benefits of company vehicles is that your employee drivers don’t have to worry about any of the maintenance or responsibilites associated with owning or leasing a car. They’re simply provided with a vehicle that’s ready to use for work.
Employees also aren’t reliant on public transit — typically a slower option — for any work trips, allowing for company vehicle programs to be an efficient and helpful option for business travel.
Company vehicles are also traditionally seen as a prestigious perk for employees. Offering a company car can be part of a competitive offer to potential hires, or could even contribute to employee retention.
A significant downside of a company vehicle program is the cost for the company of actually acquiring and maintaining these vehicles. Beyond the expected upfront cost of purchasing or leasing company vehicles, there are also ongoing costs for things like maintenance, repairs, and other expenses to ensure they’re functioning well.
Even though providing a company vehicle is a perk, this can be detracted by something called personal use chargebacks. Personal use chargebacks are when employees who have a company vehicle have to pay the company an amount when they use the company vehicle for personal uses. This can make the benefit less appealing.
Companies are also continuously changing and evolving. And importantly, a company vehicle program can be difficult to scale. When the company hires new driving eligible employees, the company also needs to spend money on purchasing or leasing a new vehicle accordingly — as opposed to just allowing that employee to use a car they already own or lease for work. In turn, if employees with company vehicles leave or if the number of driving employees is scaled back, vehicles could be sitting unused and depreciating in value.
Typically, company vehicles are a taxable benefit when that car is also used for personal purposes. These personal reasons can include things like running errands, travel outside of work, and even commuting. This can make the benefit less advantageous to employees and also more complex for companies to manage.
What are the pros and cons of vehicle allowances?
With a vehicle allowance and when employees drive their personal vehicle for work, they’re able to choose a vehicle that they want to drive. This can reduce the potential for any complaints about driving older, out-of-date company vehicles, as employees are allowed to drive a vehicle that suits their own individual preferences.
By choosing to offer a vehicle allowance instead of a company vehicle program, employers save money by avoiding the cost of acquiring and maintaining company vehicles.
It’s important to note that vehicle allowances are also considered by the IRS as taxable income. Since they’re taxable, it can greatly lessen the amount of the benefit for employees. Employers in turn generally have to pay payroll tax on allowances, as well.
Vehicle allowances also aren’t always an accurate reflection of actual business expenses. Since they’re paid out at a predetermined amount, employees may have business expenses for driving that are either more or less than the amount of the allowance. This could mean that if an employee needs to travel and has already run out of their vehicle allowance, they may have to either pay out-of-pocket for work travel or could avoid work travel altogether.
However, there’s the possibility for tax savings, but only when allowances are provided through an accountable allowance program, where business trips and expenses are justified based on IRS guidelines and regulations.
Which option is best for your business?
The reality is that there isn’t just one perfect option that suits each and every company. Since each business has its own situation, needs, and objectives, the program that’s the best fit will naturally vary. To choose the best option for your business, be sure to carefully understand each of the programs available, so you can find the one that’s most advantageous.
Especially considering the time required to research and implement a new program, it’s a smart idea to make sure the one you choose is genuinely the right one to avoid losing more time switching to a different program down the line.
While a company-provided vehicle can seem like a prestigious offer to your employees, they’re also often a more expensive option for businesses. With all of the costs of acquiring and maintaining multiple company vehicles, it’s also possible that a company won’t be able to provide a company vehicle to all employees who drive regularly for work.
In turn, while unsubstantiated vehicle allowances offer some compensation for using a personal vehicle for work, it comes at the price of tax wastage. Since it’s generally considered by the IRS as taxable income, both employees and employers stand to lose a significant portion of the allowance.
Read more: A quick guide to taxable car allowances
Vehicle reimbursement programs
Based on the tax implications of company vehicles and unsubstantiated allowance programs, consider looking into alternative options for helping employees cover costs. One of these solutions is to provide vehicle reimbursement through a fixed and variable rate (FAVR) reimbursement program. FAVR programs are tax-free even beyond the IRS standard mileage rate, which opens up the opportunity for significant tax savings.
As long as certain eligibility requirements are met and IRS guidelines are carefully followed — including tracking business mileage and keeping detailed records — FAVR programs can present substantial advantages.
Read more: 6 Company Car Programs: The Pros and Cons
Are vehicle allowances considered company expenses?
Vehicle allowances are considered to be company expenses when they’re unsubstantiated and taxable — as opposed to substantiated accountable allowances or a FAVR program.
In contrast, when vehicle allowances are provided as part of an accountable allowance program or if compensation is given through a FAVR program, both employers and employees receive tax benefits.
Do vehicle allowances have tax benefits?
Vehicle allowances are considered to be taxable by the IRS in general. When no justification is provided to demonstrate that the allowance was used exclusively for business purposes, the IRS will treat the vehicle amount simply like additional income that’s subject to tax — both income tax for employees and payroll tax for employers.
However, there can be tax benefits if these vehicle allowances are set up and provided through an accountable allowance program. In accountable allowance programs, detailed records are kept to justify that the allowance was used for business purposes and other IRS rules on accountable allowances are followed. It’s also possible to avoid tax waste through a FAVR program, as discussed above.
Even though offering a company vehicle could seem like a prestigious benefit for employees, there are some significant drawbacks to take into consideration that can make a company vehicle program a costly and inflexible option. Vehicle allowances are another option, allowing employees to use their own vehicle for work travel — this is particularly beneficial when mileage and expenses are recorded according to the IRS guidelines for accountable allowance programs.
Mileage reimbursements — like FAVR programs — are also often a strong option for eligible companies. Both vehicle allowances and a FAVR program can help your company avoid any potential tax waste, benefiting both your employees and the company itself.
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.