Construction Company Reduces Fleet,
Adds FAVR, Saves $325K

THE CLIENT

A construction company offered two different business vehicle programs to employees. While 80 employees drove a company vehicle, another 181 received a car allowance. The car allowance was not compliant with IRS tax rules because the company was not withholding taxes on it.

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The Problem

When the Covid-19 pandemic hit in March of 2020, the construction company was unsure at first whether their employees would be classified as essential workers. So they immediately re-evaluated both of vehicle programs to ensure that they would be efficient and profitable going forward.

They already knew that their lack of compliance with IRS regulations for car allowances created liability in the event of an audit. During the review it also became apparent that the company vehicle program suffered from management problems. Not all employees who qualified for a vehicle actually needed one, the list of vehicles provided was too broad, and the company had neglected to administer a personal use chargeback policy, another violation of IRS rules.

The Goals

  • Fully comply with IRS rules for vehicle allowances and company vehicles
  • Appropriately manage the company vehicle program
  • Adopt and administer a personal use chargeback policy
  • Ensure the cost-effectiveness and sustainability of both vehicle programs

Solutions

Starting with tightening the eligibility criteria, mBurse helped the organization revise their company vehicle policy. They continued to provide the executives a company vehicle while offering the tenured project managers the choice of a company vehicle or a redesigned car allowance. They pared down the vehicle selector list from nine vehicles to just two – one for management and one for pool vehicles. Finally, to measure business vs. personal use, they adopted the mLog mileage app, which allowed them to begin charging back employees for personal use of company vehicles.

For other employees, the organization switched from a standard car allowance to a fixed and variable rate (FAVR) car allowance. This FAVR allowance would comply with the IRS regulations for a non-taxable car allowance. The main change for employees was the addition of a variable mileage rate to the fixed car allowance. The streamlined company car program more than paid for the improvements to the car allowance as well as the services of mBurse.

The Numbers

Restructuring the vehicle program delivered instant ROI

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$325K
Company Savings

Results

the first year, the company saved over $325,000 through finetuning the company vehicle program and getting compliant with both vehicle programs. While some employees lost access to generous perk, the organization positioned itself to operate with sustainable and cost-effective policies going forward. The FAVR vehicle allowance that replaced the company vehicle for some employees ensured fair and competitive vehicle reimbursements in the present and future.

Key Takeaway

The Covid-19 pandemic forced many businesses to re-evaluate the desirable but expensive offering of company vehicles. Proper management of fleet policies is essential to keep the program affordable. Some organizations may find it necessary to transition some or all of their employees from a company vehicle to a FAVR vehicle allowance instead, or to operate a pool of shared vehicles, depending on the actual roles and transportation needs of employees.