Rising Gas Prices and Tax Reform: A Costly Combination

Written by mBurse Team Member Apr 17, 2018 11:04:12 AM

Gas prices are rising again, which means reported business mileage will rise, and employee productivity will drop. New changes in the tax code to limit deductible business expenses only increase the likelihood of this outcome. It's important to understand these predictable trends in order to protect your company’s bottom line.

Why gas prices rise

It’s almost summer, and most summers bring a jump in gas prices. People travel more in the summer, and as demand for gas increases, so does the price. Combine that with an expected decrease in production by major oil companies as they switch from the winter blend gas mix to the summer mix, and you’ve got a recipe for a serious price hike. Gas prices have already crept up over the past two months, and both CNN and the Wall Street Journal report that we could see a 14% increase during the summer of 2018.

Given this likelihood, how will increased gas prices affect your company costs and productivity? In part, it depends on how you reimburse your employees for their business travel expenses. If your reimbursement amount does not rise and fall with gas prices, employees will take steps to recoup what becomes an unreimbursed business expense during times of high gas prices.

Everything you ever needed to know about mileage reimbursements

How gas prices impact car allowances

First of all, remember that most employees are only taking home around 70% of that allowance, with the rest withheld for taxes. So the margin isn’t high for many of these employees. Even a small increase in gas prices can push employee business expenses beyond the take-home amount, especially if the employee drives a lot.

Three consequences:

  1. Employees will manage their costs and not drive as much. Sales reps and account managers can directly affect the bottom line with decreased productivity from fewer face-to-face sales calls and client meetings.
  1. Employees may report labor code violations or file lawsuits. The reason? Unreimbursed business expenses, which no longer count as deductible expenses for tax purposes.
  1. Employees will leave once the unreimbursed expenses start to pile up. They will find an employer who either pays a more generous allowance or matches reimbursement to rising and falling expenses.

How gas prices will impact companies that reimburse mileage

If your company pays a mileage reimbursement, you don’t have to worry about taxes eating into take-home pay (unless your mileage rate exceeds the IRS mileage rate). But a mileage rate that does not rise with gas prices will still leave employees essentially facing a pay cut.

Two consequences:

  1. Employees will report more mileage to keep up with higher costs. This may come in the form of driving empty miles, or it may take the form of “estimates” that exceed actual miles driven.
  1. Employees may put off trips to keep their actual costs down. This will result in decreased productivity.

21st century mileage capture

Equal reimbursement means unequal take-home pay

If everyone experiences different costs, how can you pay them the same car allowance amount or mileage rate? It’s not fair to the employees that experience higher costs. It sends the message that you are more concerned with how easily the policy can be administrated than with treating employees equitably.

Paying a car allowance or mileage allowance is administratively easy, and when you pay a car allowance you are capping your costs—as well as your employees’ expenses. And that’s the problem. You are treating all employees as if they drive the same distances and experience the same costs, even though gas prices change from month to month and vary from state to state. If you cap employees’ expenses, employees will mitigate increasing costs in ways that may not align with the company objectives.

Paying a mileage rate is also easy. But as with the car allowance, everyone experiences different vehicle costs, and gas prices change frequently. In this case, you trust your employees to record their mileage accurately. But if employees feel financial pressure to inflate their mileage, the company ledger will feel it, too. 

Rising gas prices and the 2018 tax reform

The tax reform passed by Congress at the end of 2017 complicates the reimbursement picture. Starting with 2018, the new law eliminates the tax deduction for unreimbursed business expenses. In the past, the difference between an employee’s travel costs and their allowance or reimbursement was considered a deductible business expense. But for the next seven years, employees will need to find other ways to protect their income from work-related expenses.

This means that employers cannot any longer say, “Write it off,” when a car allowance doesn’t fully cover an employee’s business expenses. Employees are facing greater pressure than ever to find ways either to cut travel expenses or inflate their mileage reimbursement. Add rising gas prices into the mix, and you’ve got a volatile combination.

In the year 2018, things outside of our control will affect gas prices. Natural disasters and weather, supply and demand, as well as world conflict will impact what everyone pays at the pump. If prices jump as expected, employees will take measures to protect themselves.

It is now more important than ever to address your car allowance or mileage rate. Employees can no longer write off 2106 expenses or unreimbursed work-related expenses. 

The ultimate guide to paying a car allowance or mileage reimbursement

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