Chasing fuel savings
From the October 2020 print edition
Despite the rise of remote work, driving remains essential to many business aspects. From onsite meetings to deliveries and more, there are employees who need mobility. Every business must choose the best approach for its vehicle program. But different approaches can impact employee satisfaction and the bottom line.
Some components of driving costs remain stable. The price paid for a vehicle doesn’t change after the purchase. Other driving costs change all the time. Fuel is volatile and can be different every time a driver fills up. Since January 2019, fuel costs have made up 19.9 per cent of average driving costs. But fuel made up a different portion of driving costs every month.
The volatile nature of fuel prices is one reason that paying every employee the same amount is not the best solution. It sounds like a good approach. It’s easy to manage. But the result is not fair to employees. Mileage reimbursements that pay everyone the same for every kilometre don’t consider geographic costs. Employers then overpay employees in some areas while underpaying others.
In the US, the Internal Revenue Service (IRS) mileage standard rate is often used as a reimbursement method, but this is not an accurate representation of the costs where each employee lives and drives. Since the standard doesn’t account for driving costs that fluctuate based on geography and time of year, businesses using the rate to reimburse mid- and high-mileage workers are likely to give reimbursements that do not reflect actual driving costs. Similarly, the Canada Revenue Agency (CRA) allows individuals to deduct business mileage on a cost-per-kilometre basis through the CRA mileage rate, or automobile allowance rates. Again, it is not a fixed value and can vary year to year.
The IRS mileage standard dropped from 58 cents in 2019 to 57.5 cents in 2020. The same year, the CRA mileage rate increased from 58 cents per kilometre to 59 cents per kilometre for the first 5,000 kilometres driven, and drivers are reimbursed 53 cents for each additional kilometre. There is another four cents per kilometre in the Northwest Territories, Yukon and Nunavut. Throughout the year, actual driving costs changed month to month in both countries based on variables like the cost of gas, local taxes and insurance premiums.
When employers use a one-size-fits-all approach regardless of location or individual situations, they end up spending more than they need to on mileage. This creates winners and losers by over- or under-reimbursing drivers for their costs – which can occur at any time throughout the year as actual driving costs fluctuate while the IRS or CRA mileage rates remain the same throughout the year.
Car allowances are another popular one-size-fits-all approach. While allowances are easy to manage, they also don’t reflect geographic cost differences, and are not fair to every employee.
Another drawback to car allowances? They are a fixed cost for employers. No matter how many miles driven each month, employers pay the same. Allowances are treated as compensation, meaning they are taxed like all other income. This tax waste impacts both employees and employers.
For example, for every $100 taxable stipend, $38 is lost to taxes in the US. This means that employees with a $575 monthly car allowance will only take home $393 of that stipend. Likewise in Canada, a car allowance will be considered a taxable benefit if an employee or officer is paid a per-kilometre rate that the CRA considers too high or too low (and thus not reasonable), or a flat rate allowance that is not based on the number of kilometres driven.
The fixed and variable rate (FAVR) reimbursement methodology remains a flexible solution in any economy. By breaking the reimbursement into fixed and variable costs, companies can react to the market’s conditions no matter how volatile they get. Fixed costs are constant month over month but vary from employee to employee. They include things such as insurance premiums, license and registration fees and taxes and depreciation. On the other hand, variable costs vary month over month and are based on the number of business miles driven, including gas, oil, maintenance and tire wear.
With FAVR, fuel price fluctuations are reflected in every reimbursement and each fixed and variable cost component is localized to the places employees work and drive. The result is a fair and accurate reimbursement.
Especially due to the economic uncertainty from the pandemic, leaders are looking for ways to add both flexibility and efficiency to business expenses. The IRS and CRA mileage rates are recommended for high-mileage drivers only (Over 5,000 business miles or 5,000 business kilometres, respectively). For others, alternate methodologies like FAVR programs let employers quickly reduce tax waste while staying flexible to scale vehicle program expenses up or down as necessary.