AAG: Driving a personal vehicle for work incurs quite a few expenses that drivers need to be reimbursed for. Here’s a rundown of what costs to cover when calculating your car allowance.
Car allowances enable employers to properly reimburse employees who drive their personal vehicles for work purposes. They are a common way for companies to fund employee-owned fleets, and they can be especially useful as driving costs can add up quickly.
From oil changes to car depreciation, there are several expenses to consider when calculating an allowance that’s fair for your drivers and complies with federal tax regulations. Let’s unpack everything you should be accounting for when your mobile employees are on the road.
What expenses do allowances reimburse?
Expenses typically fall into two main categories: fixed and variable. Fixed expenses are those that stay the same no matter how much a car is driven. These include costs like depreciation or lease payments, insurance premiums, license and registration fees, and personal property taxes.
On the other hand, variable expenses are those that change based on fluctuating external factors like monthly mileage amounts and regional market prices. Expenses under this category include fuel, oil changes, tires, routine maintenance, and repairs.
While car allowances can be a convenient way to reimburse employees for these expenses, they do leave you open to taxation if you are not granular with your expense tracking. To avoid potential tax liabilities, we strongly suggest keeping accurate records of all car-related expenses, including receipts for gas, repairs, and maintenance. In fact, some car allowance plans, like Fixed and Variable (FAVR) programs and Cents per Mile (CPM) reimbursements, require detailed mileage logging. For more information about tax regulations for certain car allowance plan types, please visit The Ultimate Guide to Car Allowance for 2023.
Let’s dive into how each expense type factors into your car allowance plan.
Depreciation and lease payments
A car that is five years old is not worth as much as it was when brand new. This is depreciation— a fixed monetary loss in value that drivers can be reimbursed for when using the same vehicle for work over an extended period of time.
Calculating depreciation for reimbursement purposes can be done by consulting your vehicle’s depreciation schedule, which provides an estimate of the vehicle’s value over time. Or, you can also use a depreciation calculator like this one, which considers factors such as the vehicle’s purchase price, age, and mileage to determine its depreciation value. Once you have determined the depreciation value of the vehicle, you can then average it over your reimbursement period (for purposes of continuity in this article, we’ll go with a month) and add it to your total car allowance value.
For example, say an employee is driving a 2023 KIA K5 valued at $30,000. Every year, your employee averages 13,500 miles, putting their car at a yearly depreciation rate of 10%. So after one year, that means their vehicle’s value will drop to $27,000. Divide the $3,000 difference by 12 months and the funds needed to account for depreciation alone will be $250.
The process is slightly different for lease payments. Since they are already structured into fixed monthly payments, the lease can be deducted from the monthly reimbursement amount. However, if the reimbursement is being paid directly to the employee, the business use percentage must first be established.
To do so, you’ll have to determine the percentage of time the vehicle is used for work purposes ( if your employee drives 5 out of 7 days, for instance, the percentage would be 71.4%). Then, factor this percentage into your employee’s monthly lease payments. If your employee’s monthly lease payment is $500, multiply that by 0.714 to get a monthly reimbursement amount of $357.
Remember, the point is to compensate employees for their business use of the vehicle—any other use cases for car allowances are considered taxable income.
Insurance premiums are another fixed expense included in car allowances. Insurance is actually required for tax-free Fixed and Variable Rate (FAVR) car allowances because it provides protection in case of accidents or other incidents that may occur while the vehicle is being used for work purposes.
Reimbursing employees for insurance premiums is as easy as repaying your team for the monthly business expense of the insurance, which can typically range from $50 to $150 per month depending on the coverage level. This can help to reduce the financial burden on employees who use their personal vehicles for business, while also affirming that your company is facilitating a safe and proactive work environment.
License and registration fees
These fixed fees are required by law and can vary depending on the state and the type of vehicle. For example, in California, the registration fee for a passenger vehicle is calculated based on the vehicle’s value and can range from $46 to over $250 per year. In Texas, the registration fee for a passenger vehicle is a flat fee of $50.75 per year (as of 2023).
To determine how much of these fees to reimburse, companies can average the yearly cost of the license and registration fees and divide it by 12 to get a monthly reimbursement amount. By including these fees in the car allowance, employees can be sure that they have the necessary funds to keep their vehicle registered and in compliance with state laws.
Bear in mind that if employees do not register their vehicle or renew their license on time, they may incur late fees or other penalties. To avoid this, you may want to require employees to provide proof of registration or licensing as a condition of reimbursement.
Personal property taxes
Personal property taxes are annual taxes assessed by state and local governments on personal property such as vehicles, boats, and airplanes. In the context of car allowances, personal property taxes refer to taxes on the employee’s personal vehicle used for work purposes.
Like registration and license fees, they also vary by state, and reimbursing drivers for these expenses can make using their vehicles for work more financially feasible. For states where personal property taxes are deducted, you can average the tax amount over the reimbursement period and include it in your monthly tally. For example, if the employee’s personal property tax for the year is $300, the monthly reimbursement amount would be $25.
As mentioned, you might want to do a bit of research into property taxes for your state. You can use resources like state tax websites or consult with local tax assessors to determine the correct tax amount.
Fuel costs have risen significantly in recent years, and this has increased the cost of driving for mobile employees. By accounting for fluctuating fuel prices, you can ensure your employees have the necessary funds to cover the cost of fuel when fulfilling their business obligations.
Since this is a variable cost, we recommend that employees keep a mileage log to track how much each gas refill costs throughout the reimbursement period for an accurate allowance amount. See our blog on gas price impacts on mileage reimbursements to explore how fuel costs should be calculated for different car allowance types.
Other variable expenses: oil changes, tires, routine maintenance, repairs
In addition to fuel costs, car allowances may also include reimbursement for other variable expenses such as oil changes, tires, routine maintenance, and repairs. With these expenses, regional pricing will vary.
For example, the cost of an oil change in a busy city like New York City may be significantly higher than the cost of an oil change in a smaller town in rural South Carolina. Look to local service providers or online cost calculators for exact estimates.
Keep track of every expense with Cardata
Cardata is here to help streamline and simplify your car allowance program so that you can focus more on your business. With customized reimbursement programs that are federally compliant and mindful of your enterprise needs, we can help you craft an allowance plan that keeps your reimbursements tax-free to save you money. And for accurate mileage tracking, our user-friendly app leverages intelligent software and automated features so that all expenses are properly accounted for—down to the last cent. Book a demo with us today and experience the Cardata difference.