Manufacturers’ Rep Firm Gains 373% ROI
in First Year of FAVR Program

THE CLIENT

A manufacturing representative company was paying its employees a flat taxable car allowance while also reimbursing fuel and providing maintenance with a free set of tires every 18 months. Approximately 60 drivers were receiving these benefits.

manufacturers-rep

The Problem

This client had been paying the same taxable car allowance amount for several years. Over time, concerns that the car allowance was not enough resulted in the addition of the various reimbursable items – fuel, maintenance, and tires. Adding these benefits created a complicated system that grew more costly as time passed, raising questions about sustainability and scalability.

IRS compliance had also become a problem. The organization did not substantiate the business use of the fuel, maintenance, and tires. Nor did they measure the personal use and chargeback employees. Both business substantiation via a qualifying mileage log and personal use chargebacks are required to keep reimbursable items free of tax liability. Failing to follow these guidelines had left the company exposed in the event of an audit.

The company did withhold taxes from the car allowance in compliance with IRS rules. However, the system of business reimbursement was inefficient. Both the company and employees were paying taxes on an expense that could be treated as a reimbursement if properly substantiated, on top of the other reimbursements that were not being properly substantiated.

The Goals

  • Provide an IRS-accountable plan for vehicle reimbursements
  • Remove tax waste through a fully non-taxable program
  • Tighten up the policy with a more efficient structure
  • Stop potentially over-reimbursing vehicle expenses and optimize the car allowance

Solutions

When the client decided to partner with mBurse, we immediately proposed a FAVR program. The fixed and variable rate (FAVR) reimbursement model was perfectly suited to solve the majority of the issues. One single plan could right-size the car allowance while keeping it and the other reimbursements non-taxable.

Because an IRS-complaint FAVR plan already takes into account the costs of fuel, maintenance, and tires, these reimbursements were eliminated as separate benefits. These expenses would now be reimbursed through a variable mileage rate in addition to the optimized monthly allowance.

The mBurse mileage app, mLog, would allow the organization to properly measure and substantiate the business use of the vehicle and associated costs, keeping the entire program IRS accountable. As part of the process, we were able to calculate a transparent reimbursement rate for each driver based on their costs within their driving territories.

The Numbers

1st year savings: near-immediate ROI

fullGreen
373%
Return on Investment
Employee benefits
+5.58%
Employee Benefit
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$135K
Annual Savings

Results

Adopting a FAVR program allowed the client to reallocate money into a sustainable reimbursement that remained robust for employees. By eliminating taxes from the car allowance, they were able to pay an optimal amount while saving money. They also had been slightly over-reimbursing the employees by paying too much for maintenance and not measuring the business vs. personal use. The new program eliminated this over-payment by optimizing the reimbursements.

Savings on fuel costs also came because FAVR incorporates fuel into the mileage rate. Accurately measuring the business use and eliminating paying for personal use combined to provide further savings. Overall, employees on average actually reaped a modest increase in their benefit because the elimination of the taxes on the car allowance more than covered the removal of the over-payments related to maintenance and fuel.

Key Concepts

It is vital to substantiate the business use of a personal vehicle for work. By investing in the right tools and procedures, an organization can eliminate wasteful taxes on car allowances while also staying compliant with reimbursement of expenses.

A FAVR reimbursement program combines a non-taxable allowance with a geographically sensitive and transparent reimbursement rate. Adding reimbursements on top of a standard car allowance, on the other hand, is destined to create costly complications. FAVR programs are designed to accomplish the same goals in an IRS-accountable and streamlined manner.