With fuel costs skyrocketing in the wake of unprecedented worldwide demand for oil, the cost of operating a vehicle has been steadily increasing for the last several years. In response, the IRS has increased vehicle reimbursement levels twice this year – once from 48.5 cents to 50.5 cents effective January 1 and again to 58.5 cents effective July 1. In addition, companies are reassessing their vehicle reimbursement policies to determine the extent to which they cover actual operating costs. I recently conducted a study that approached vehicle allowance from two distinctly different vantage points:
1. Various statistical sources were consulted to determine the actual cost of operating a vehicle in today’s dollars.
2. An informal survey was conducted involving several large employers to determine how these companies are responding to the fuel crisis and the level of reimbursement they are currently offering to executives and other employees to offset these costs
The survey included eight California-based companies from a variety of industries (including healthcare, electronics, financial services, manufacturing, and consumer products) and one company headquartered outside of California.
The survey included eight California-based companies from a variety of industries (including healthcare, electronics, financial services, manufacturing, and consumer products) and one company headquartered outside of California.DATA SOURCES
The following data sources were used to determine the current cost of vehicle operation:
Vehicle Operating Costs -- Based on AAA 2008 Edition of "Your Driving Costs"
Current Fuel Costs-- Energy Information Administration (EIA) of the US Department of Energy (DOE) Statistics for the week of 6/30/08.
IRS Standard Reimbursement – Internal Revenue Service US Department of the Treasury.
VEHICLE OPERATING COST ANALYSIS
The table on the following page summarizes total current vehicle operating costs. The analysis is presented both in terms of total cost as well as cents per mile at three different annual mileage levels (10,000/15,000/20,000) and four different vehicle sizes.
All data are based on national averages with the exception of fuel costs which are based on the average for the San Francisco/Bay Area as of June 30, 2008. Vehicle operating costs take into consideration all associated expenses including:
● Full Coverage Insurance
● Finance Charges
Click here to view a summary of the results --> Download vehicle_cost_summary.pdf
COMPANY VEHICLE ALLOWANCE POLICIES AND PRACTICES
Below is a summary of the vehicle reimbursement practices of the nine companies that participated in the survey. The names of the companies have been omitted to protect confidentiality.
Eight out of the nine companies surveyed provide all executives with a company car or some form of car (or perquisite) allowance.
Three of the participants provide leased cars to executives. Two of the three allow executives to select their own vehicle up to a maximum Manufacturers Suggested Retail Price (MSRP). One of the participants limits the selection to three specific vehicle makes and models. Those organizations that provide company cars also cover all maintenance, upkeep and repairs. In addition, it is customary to provide executives with a either company credit card for fuel or reimburse for fuel at the standard rate of 58.5 cents per mile.
Vehicle allowances range from $400 to $1,000 per month.
One participant provides executives with a “perquisite allowance” of up to $15,000 (based on job level). The recipient is free to use the allowance in any way s/he sees fit (i.e., vehicle, club membership, financial counseling, etc.) though most use it to pay for a car.
Six of nine participants reimburse executives for business use of their vehicle at the standard IRS allowed rate of 58.5 cents per mile. This applies both to company cars and business use of personal vehicles (but does not apply in situations where a gas card has been provided). All companies surveyed reimburse for business-related tolls and parking.
One participant varies mileage reimbursement based on the size of the monthly car allowance -- The higher the allowance, the lower the mileage reimbursement. This is due to the fact that the standard IRS allowance of 58.5 cents per mile is intended to cover more than merely fuel and it is viewed that non-fuel-related expenses are offset by the monthly allowance.
One participant reduces the amount of covered gas expenses for executives whose vehicle fails to meet minimum miles per gallon (MPG) standards set by the company.
One participant has recently phased out all executive vehicle allowances entirely, stating that executives use their vehicles almost exclusively for commuting to and from work making vehicle allowances an unnecessary expense.
FINDINGS & OBSERVATIONS
Below are the major finding and observations resulting from the study:
1. The total annual cost of operating a vehicle ranges from approximately $6,000 to $13,000 per year depending on the size of the vehicle and amount it is driven
2. Vehicle allowances range from $400 to $1,000 per month.
3. For all but the smallest cars, driven fewer than 10,000 miles per year, the standard IRS allowance for mileage reimbursement does not cover the total cost of operating a vehicle, although it is more than adequate to offsite the costs associated with occasional business travel.
4. There is little consistency or agreement in the way companies approach compensating executives for operating a vehicle.
5. The vast majority of executives use their vehicles for little more that commuting to and from work. As such, the decision to provide them with a company car or a vehicle allowance is really more of a perquisite than a necessity.
6. Because of the amount of business miles actually driven by typical executives, the value of the benefit they receive is often perceived more as a supplement to their ordinary cash compensation than as an offset of actual expenses incurred.
7. Since companies exhibit such a wide range of vehicle reimbursement policies and practices, and since the actual cost of operating a vehicle depends almost entirely on how much that vehicle is used for business purposes, each company must arrive at its own philosophy and approach for compensating executives and cannot rely on common practice.
Feel free to contact me for more information on the results of this study.