It happens all too often. A company looking at their business vehicle program options will find a company car representative sharing a figure too good to be true. They've done the math, and it shows you how, overtime, fleet vehicles are going to save the company money. Not only save, but save significantly more than a cents-per-mile reimbursement. With savings like those, why consider another option? Well, we might be inclined to agree… if that were the full story. So what aren't fleet company representatives sharing? Here we debunk the myth of a company car program cutting more costs than a Fixed and Variable Rate (FAVR) program.
Let’s begin with the premise of their offer: they claim that a cents-per-mile (CPM) reimbursement, capped by the IRS Safe Harbor Rate at 54.5 cents, will become more expensive than a company car program—vehicles owned or leased by the company—whose cents-per-mile cost rarely stretches above 35 cents-per-mile. If the mileage remains less than 5,000, a CPM reimbursement will be less expensive. But is it true that a company will end up paying a lot more for drivers in the 30,000 to 35,000 mile range if they’re on the CPM program? Absolutely.
So where’s the myth? The myth is in the assumptions that the company car representative makes. First, they assume your company will use a static cents-per-mile program. However, a FAVR program ensures mileage is reimbursed at a geographically specific price, tailored to the driver’s expected distance traveled, not just set to the highest tax deductible rate.
They also assume that Fleet costs are just as static, not taking into account operating costs. Due to the Financial Accounting Standards Board’s upcoming lease accounting rules for public companies, organizations will be required to record assets and liabilities for leased property and equipment beginning in 2019. This compounds the additional administrative burden already associated with company cars.
Furthermore, the representative assumes you want to spend more on the whole. Here’s an analogy. Let's say your company is growing and needs to expand. You could spend 2 million a year to lease a building in a thriving city, or you could spend $100,000 a year to lease the floors you need in a building. If you go with the first option, you will be paying less per square feet. But you’re also paying more in total than you would be if you went with the $100,000 lease. Where a FAVR program will be about $9,000 a year, a fleet program will be $12,000 a year for the same number of participants.
Below is a graph outlining the actual cost of fleet, compared with the highs and lows fleet companies will pitch, and the cost of FAVR. At every mile amount beyond 1,000 there is a clear winner, but even these numbers leave out a large Fleet expense.
Company car programs come with a handful of additional costs: risk 24/7, handling repairs and replacements in the event of a recall, constant fluctuation of the mobile sales team might leave unused vehicles in their parking spaces, depreciating in value. According to our benchmark survey, 67% of auto accidents happen outside of normal business hours. That means a company car exposes the company to liability more than a personal vehicle in the FAVR program.
There’s a reason FAVR is so popular. It benefits both the company and the participant. By offering reimbursement for both the fixed prices—insurance, taxes, depreciation, and registration—and variable prices—fuel, maintenance, oil, tires, and other incidental expenses—companies can offer participants the freedom of driving the car of their choice, while also benefiting from the same reduced tax burden as its employees. Without the workload of managing a company fleet program, the IRS-approved program additionally maximizes personnel. For more information, check out our information on the cost of fleet and the cost per mile lie.
About the Author
Arthur has over 16 years of experience of account management and consulting in the Financial, Real Estate, Information management, compliance, and employee mobility markets. He is routinely recognized as a top performer in B2B sales and consulting.More Content by Arthur Tsakonas