This year, the standard IRS mileage deduction rate decreased slightly from $54 cents per mile to $53.5 cents per mile. While this rate change (used to calculate deductible business-related vehicle use) might seem insignificant it’s still worthwhile to review your organization’s employee personal vehicle reimbursement policy to make sure it’s the most cost-effective option.
When staff use their personal vehicle to travel for business-related activities, they are often reimbursed the IRS allowed deduction rate which for 2017 is $53.5 cents per mile. When calculating the mileage allowance the IRS takes into account the typical expenses associated with the operation of a vehicle.
If a handful of employees use their personal vehicles only a few times per year, the full mileage rate reimbursements might be negligible. However, mileage reimbursements start to become worthy of review when an organization requires employees to travel frequently throughout the year. For example, if a sales manager travels 15,000 miles per year to meet clients, it may be more cost effective for him or her to use a company car for travel.
Here are three ways to make your company’s travel reimbursement policy more cost-effective:
1. Calculate a travel benchmark
An organization should review their previous year’s mileage reimbursements and determine a breakeven point, for which it is more financially beneficial to the organization for employees to rent a car or use a company car instead of their own vehicle. For example, a company could determine that employees who travel more than 150 miles round trip are required to use a rental car because the mileage rate reimbursement amount ($80.75) will cover the cost of gas and renting a mid-sized car.
2. Consider switching to a company car for high mileage drivers
To help streamline costs associated with travel reimbursements, organizations should consider creating guidelines for employees who frequently use their own vehicle for travel. An employee that travels more than 12,000 miles per year would be reimbursed $6,420, which could help offset vehicle maintenance/repairs. However, many employees who frequently make business-related trips using their personal vehicle can rely on the reimbursements as additional income beyond their salary. For example, an employee that travels 30,000 miles annually would receive a $16,050 reimbursement.
Organizations should determine a mileage breakeven point for when it would be beneficial to provide employees with either a monthly vehicle allowance or a company car. For example, if a company decided to provide employees who drive more than 12,000 miles annually with a $350 monthly vehicle allowance, it would likely cover the cost of gas and maintenance, but still be more affordable than the current mileage rate reimbursement. For employees who meet a higher-mileage threshold, 25,000 miles for example, it may be worth it to switch to a company car program instead of providing a $13,375 reimbursement.
Transitioning to a company car program can be done in phases. Organizations should draft a plan and determine an implementation timeline that is communicated to their staff. For example, if a company wants to move towards a travel allowance or company car program over a two-year span, they should notify affected staff of the coming changes early on and provide a timeline so that they feel prepared. New hires can be mandated to utilize the company car program and some staff members may become early adopters (especially if they have older vehicles).
3. Teach staff to take deductions on their own
Another approach would be to factor a portion of travel reimbursement costs into an employee’s compensation and to teach them to take IRS allowed deductions on their income taxes.
Overall, taking the time to review your organization’s employee owned mileage reimbursement practices and implement changes to your organization’s policy can streamline your organization’s travel reimbursement costs.