In December 2017, when Congress passed the biggest tax reform in 30 years, they effectively forced companies to reshape vehicle allowance and reimbursement policies over the next seven years. Even though it won’t be until the 2019 tax-filing season that taxpayers fully experience the effects of this law, now is the time to review your company’s policies.
Tax cuts to corporations and individuals stole the headlines, but the elimination of the unreimbursed business expense deduction will have the greatest impact on companies that pay a car allowance or reimbursement. Companies can no longer rely on employees writing off unreimbursed business costs, leaving employees more reliant than ever on the company to fully cover their costs.
This new tax landscape raises the stakes for employers with mobile employees (those who drive personal vehicles to do their jobs). An organization’s ability to reimburse properly while controlling costs will determine whether they avoid labor code infractions and lawsuits resulting from insufficient reimbursement.
New tax code, new reimbursement perspective
In light of the new tax code, it’s time to reimagine vehicle reimbursements. Car allowances and mileage reimbursements have historically been considered a simple cost of doing business. Providing a flat, taxable car allowance or providing a mileage reimbursement made sense for a long time because they are easy to budget for and administer. Precise accuracy in reimbursement was unnecessary because employees whose allowance or reimbursement came up short could simply write off the difference on Schedule A of their tax return the following year.
But the elimination of this deduction increases the risk of labor code violations and employee turnover. It is time to adopt a new perspective on your vehicle allowance or mileage reimbursement policy. Accuracy and fairness must take priority. Your car allowance can no longer be treated as a simple cost; it has to be viewed as an investment in your most valuable resource: your employees.
Adding up the costs of outmoded policies
Your company’s auto allowance or mileage reimbursement policy touches many interrelated parts of your organization:
- Risk – labor code violations and lawsuits
- Attrition rates – productivity loss and costs of employee turnover
- Cost control – both direct spend on car allowances or reimbursements and costs associated with risk and attrition
Labor code fines and class action lawsuits are expensive—there’s no way around it. If you have employees that work in a state that indemnifies workers from company expenses—California, for example—failure to fully reimburse expenses will eventually lead to these consequences. Plus, labor code violations and lawsuits will generate negative PR and hinder recruitment of new talent.
Attrition rates also generate significant costs, which can be simply calculated by adding up the costs of:
- the hiring process
- onboarding and training
- the learning curve (time required to reach peak productivity)
- productivity lost due to an unfilled position
Cost control remains a challenge no matter which type of program you employ. Mileage reimbursement costs depend on mileage tracking and reporting. Auto allowances generate tax waste for both the employee and the employer. Furthermore, if employees experience a gap between their work expenses and the employer’s offset, they will find ways to close the gap, whether by driving less (car allowance) or driving/reporting empty miles (mileage reimbursement).
Reshaping your policy before 2019 hits
There are three options to make a change with your current car allowance or mileage reimbursement policy:
- Pay the IRS mileage rate – It may be overkill, but it’s quick and easy; you’ll probably reduce risk and prevent attrition, but you’ll sacrifice cost control.
- Reimburse each employee precisely – Requires data, customization, and administrative effort but robustly addresses risk, attrition, and cost control.
- Do nothing – Continue doing what you are doing and wait until a crisis forces you to make changes…
It is now more important than ever to address your car allowance. As the 2019 tax season approaches—less than six months from now—employees will be looking for their costs to be covered more than ever.