Thanks to changes brought about in the Tax Cuts and Jobs Act (TCJA), vehicle programs – an area that has long escaped attention – can be a potential source of cost savings for your clients and additional business for your practice.
Car allowances are a current favorite reimbursement method for businesses, largely due to their simplicity for management and predictable costs. Moreover, with increasingly mobile and tech-enabled workers taking to the road, vehicle programs now impact a significant segment of the population.
Hundreds of thousands of mobile workers receive a car allowance every month, but these programs have drawbacks. Employers rarely have a way to verify insurance policies, leaving them open to risk if an employee is involved in an accident.
Perhaps more significantly, reimbursements are widely imprecise due to highly-variable geographical and individual costs. Additionally, rates are often set once, but rarely reviewed or changed afterwards. This leads to tax waste for both employers and individuals.
Billions Lost to Taxes Each Year
According to the recent Vehicle Program Tax Waste Report, a whopping 39 percent of one year’s car allowance expenses are lost to tax waste today. The total tax waste for individuals and employers reaches $1.2 billion each year.
On the employer side, that means companies are paying more than $200 million each year in payroll taxes alone – losing an entire year’s average car allowance to taxes every 2.5 years. On the individual side, that annual tax burden from car allowances totals $1 billion in the U.S. each year.
How do those numbers add up? Let’s break them down in an example: When a mobile worker receives $575 per month (the average nationwide monthly allowance), they only actually pocket $393 after taxes. In addition, that $575 allowance costs employers about $619 per mobile worker, since they are responsible for payroll taxes to cover social security and Medicare taxes.
So, in total, $226 is lost to taxes on a $575 car allowance every month between employers and individuals. Or, for every $100 paid in monthly car allowance, $38 is lost to taxes.
This issue is compounded by the fact that in the past, individuals could claim a tax deduction for unreimbursed business mileage expenses. That deduction softened the tax burden on their car allowance. However, tax law changes that took effect in 2018 eliminated this deduction.
Uncovering Savings for Businesses and Mobile Workers
The good news for accountants looking to unearth new savings for clients is that not all vehicle programs are classified as taxable benefits like car allowances. Increasingly companies are choosing to reimburse mobile workers tax-free, using a Fixed and Variable Rate (FAVR) reimbursement program.
Unlike car allowances, FAVR programs reimburse employees for their individualized fixed costs –constant month over month expenses like insurance premiums, license and registration fees, taxes and depreciation – and variable costs – expenses that vary month over month such as gas, oil, maintenance and tire wear. By tracking, logging and calculating these costs on an individualized basis, employers and individuals are able to take advantage of the IRS-recommended FAVR methodology, achieving tax-free, fair and accurate mileage reimbursement.
Businesses and individuals have been slow to adopt FAVR due to its complexity and rigorous logging requirements. However, as cloud technology, automation and AI-enabled systems capable of calculating the exact cost of driving specific to each individual become more commonplace and accessible, we’re beginning to see that dynamic shift. Mileage tracking and reimbursement systems are making FAVR methodology easy to achieve for organizations of any size that are savvy to the potential savings in this space.
Keeping clients informed about their options when it comes to vehicle programs may save significant sums on the business and individual side. It’s an area that will be helpful for accountants to familiarize themselves with in the months and years to come.