Carolina Ceramics is a brick manufacturer servicing commercial properties on the East Coast. The company is expanding and looking to add sales staff, and will be replacing about half its vehicle fleet within a year. This prompted Chief Financial Officer Mike Goodrich to reexamine how the company pays for vehicles for business use. The company currently uses a mix of mileage reimbursement, car allowances and company-provided cars. When the company acquires the new vehicles, what methods will make the most sense financially, for the business and its employees?
We turned to the vehicle leasing and tax experts at EmpowerInc.com to provide some answers. Their online program calculates the many financial and tax scenarios for the lease, purchase or reimbursement of any vehicle. Goodrich can use the program to weigh the financial ramifications of each scenario with the many non-monetary factors in a vehicle business-use analysis, such as employee recruitment and retention, company image and insurance and liability issues.
For the analysis, Goodrich provided employees’ current vehicles and replacement needs. We inputted into the program variables such as vehicle type, estimated purchase price, length of time in service, operating expenses and percentage of business use.
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Click here for pdf chart of vehicles' financial scenarios.
President The president wants a $75,000 German sedan. It will be hit hard by the current luxury car depreciation limitations. Leasing this vehicle in the company name will cost $686.91 extra over a three-year lease term than to purchase it over a five-year loan term. However, tax rules limit the depreciation on a purchase to only $10,510 over three years while the lease payment can be written off in full (minus lease inclusion). The company can save $25,156.58 in tax deductions over those three years by leasing. Assuming that the company is making a profit, and is paying taxes, this is a slam-dunk. From a financial standpoint, there is no question that this vehicle should be leased. CFO Goodrich, the CFO, assumes his new SUV or pickup will be kept for five years and then traded in. His current vehicle is in the business name yet is used only 750 miles per year for business, or five percent of total usage. The company adds 95 percent personal use to his W2 as income using the government’s Lease Value Table, which determines the value of a car for the employee as a fringe benefit. The table shows that Goodrich’s desired $31,000 SUV or pickup will add $9,389 to his W2 the first year. But here’s the kicker—the Lease Value Table for personal use (unchanged since it was introduced in the 80’s) has not been aligned with the depreciation limits for business use, which are continually updated. Therefore the amount added to the employee’s W2 is greater than the amount the company can deduct during the first year on the business income tax return ($8,655) because of depreciation limitations. As a result, over the five-year evaluation period, the company can only deduct a total of $41,554, while $46,945 is added to the CFO’s W2. From a financial standpoint, the company should place the new vehicle in the employee’s personal name and then reimburse Goodrich for his business use under an accountable plan. His salary could be adjusted for the loss of a company vehicle, and the company could write off 100 percent of that raise. If done correctly, both the company and the employee can come out ahead. Plant Vehicle, Drill Truck The plant vehicle, a pickup, is used 100 percent for business and isn’t driven by a single individual, so it should be titled in the business name. We compared a five-year lease with a seven-year purchase. The results are a wash: the lease payment is $336.11 and the loan payment is $325.11. At the end of five years, the vehicle could be purchased for the residual of $7,250.00. The loan balance at that point is $7,350.35. Over the five-year lease period, the purchase option results in $650 fewer cash outlays, and yields $161.98 more in tax deductions. The lease versus buy decision here will probably come down to specific rebates, money factors and interest rates. The drill truck has 100 percent business use and is replaced every 20 years. There aren’t any real options. Purchase the truck in the business name. {+PAGEBREAK+} VP Sales The VP currently gets reimbursed 40.5 cents per mile and drives a relatively small amount for business, approximately 25 percent. This situation is very similar to the CFO’s. The vehicle should be kept in the personal name due to the high potential W2 add in from the Lease Value Table. Under the current scenario the VP will be reimbursed $4,860 for mileage over the four-year evaluation period. If the VP was reimbursed for actual expenses and purchased the vehicle, the VP would get more over the same period—$6,641 in reimbursements. If the VP leased the vehicle, he or she would receive $9,142 in reimbursements because of the higher write off on leases. Remember that every penny of a reimbursement is tax deductible to the company and tax-free to the employee. Switching to an actual expense-based accountable plan is a great way to get this employee more tax-free money. Plant Manager This employee currently receives a car allowance of $6,000 annually and only drives 2,000 miles per year. At 40.5 cents per mile, the reimbursement for business use of the vehicle comes to $810 annually. We are assuming that the difference between the $810 and the $6,000 ($5,190) is taxable income to the employee and is added to their W2. If actual expenses are used rather than a mileage reimbursement, then the taxable income for the employee can be reduced slightly. But with only eight percent business use, not much can be done here. Sales Rep 1 and 2 The vehicles, costs, total miles and business miles are similar for the Sales Reps. The difference is the car allowance: Sales Rep 1 gets $500 per month while Sales Rep 2 gets $700. We did an analysis of three-, four- and five-year leases in the business name, with the employees reimbursing the company for personal use of the vehicle. Chart 2 shows the costs under the various scenarios. A five-year lease would cost the company $8,172 per year, a four-year lease would cost the company $9,200 per year and a three-year lease would cost the company $9,730 per year. It isn’t going to cost the company much more to provide newer, more reliable vehicles in the company name for the sales reps over giving them a car allowance. This is also where the non-financial benefits of a company-owned or leased vehicle, such as employee retention and company image, come more into play. It makes sense to lease these vehicles in the company name.
Sales Manager
The Sales Manager’s situation is similar to the Sales Reps’. She has the same type of vehicle and gets a $500 per month car allowance. However, she drives slightly more miles, 29,000 per year, but has a much lower percentage of business use, 35 percent, than the Sales Reps’ 68 percent. Under the current scenario, with a $500 car allowance and only 10,000 business miles per year, she will have about $2000 added to her W2 each year as income. The company could look at putting the vehicle in the business name and have the employee reimburse the company for the personal use. However, at 65 percent personal use, the amount she would owe back to the company is almost as much as she’d be paying on a loan.
How much your company spends for the business use of vehicles is only one part of the lease, purchase or reimburse question. Non-monetary factors such as company image, hiring and retention issues, employee morale, productivity and liability exposure complete the answer. Yet calculating your hard-dollar outlays is the right place to start. By knowing how much you’ll pay in each scenario, you can better understand the value of those intangibles and make a more informed decision.
Our financial experts recommended only slight adjustments to the way Carolina Ceramics paid for the business use of its vehicles. However, those small changes could save the company good money.
President The president wants a $75,000 German sedan. It will be hit hard by the current luxury car depreciation limitations. Leasing this vehicle in the company name will cost $686.91 extra over a three-year lease term than to purchase it over a five-year loan term. However, tax rules limit the depreciation on a purchase to only $10,510 over three years while the lease payment can be written off in full (minus lease inclusion). The company can save $25,156.58 in tax deductions over those three years by leasing. Assuming that the company is making a profit, and is paying taxes, this is a slam-dunk. From a financial standpoint, there is no question that this vehicle should be leased. CFO Goodrich, the CFO, assumes his new SUV or pickup will be kept for five years and then traded in. His current vehicle is in the business name yet is used only 750 miles per year for business, or five percent of total usage. The company adds 95 percent personal use to his W2 as income using the government’s Lease Value Table, which determines the value of a car for the employee as a fringe benefit. The table shows that Goodrich’s desired $31,000 SUV or pickup will add $9,389 to his W2 the first year. But here’s the kicker—the Lease Value Table for personal use (unchanged since it was introduced in the 80’s) has not been aligned with the depreciation limits for business use, which are continually updated. Therefore the amount added to the employee’s W2 is greater than the amount the company can deduct during the first year on the business income tax return ($8,655) because of depreciation limitations. As a result, over the five-year evaluation period, the company can only deduct a total of $41,554, while $46,945 is added to the CFO’s W2. From a financial standpoint, the company should place the new vehicle in the employee’s personal name and then reimburse Goodrich for his business use under an accountable plan. His salary could be adjusted for the loss of a company vehicle, and the company could write off 100 percent of that raise. If done correctly, both the company and the employee can come out ahead. Plant Vehicle, Drill Truck The plant vehicle, a pickup, is used 100 percent for business and isn’t driven by a single individual, so it should be titled in the business name. We compared a five-year lease with a seven-year purchase. The results are a wash: the lease payment is $336.11 and the loan payment is $325.11. At the end of five years, the vehicle could be purchased for the residual of $7,250.00. The loan balance at that point is $7,350.35. Over the five-year lease period, the purchase option results in $650 fewer cash outlays, and yields $161.98 more in tax deductions. The lease versus buy decision here will probably come down to specific rebates, money factors and interest rates. The drill truck has 100 percent business use and is replaced every 20 years. There aren’t any real options. Purchase the truck in the business name. {+PAGEBREAK+} VP Sales The VP currently gets reimbursed 40.5 cents per mile and drives a relatively small amount for business, approximately 25 percent. This situation is very similar to the CFO’s. The vehicle should be kept in the personal name due to the high potential W2 add in from the Lease Value Table. Under the current scenario the VP will be reimbursed $4,860 for mileage over the four-year evaluation period. If the VP was reimbursed for actual expenses and purchased the vehicle, the VP would get more over the same period—$6,641 in reimbursements. If the VP leased the vehicle, he or she would receive $9,142 in reimbursements because of the higher write off on leases. Remember that every penny of a reimbursement is tax deductible to the company and tax-free to the employee. Switching to an actual expense-based accountable plan is a great way to get this employee more tax-free money. Plant Manager This employee currently receives a car allowance of $6,000 annually and only drives 2,000 miles per year. At 40.5 cents per mile, the reimbursement for business use of the vehicle comes to $810 annually. We are assuming that the difference between the $810 and the $6,000 ($5,190) is taxable income to the employee and is added to their W2. If actual expenses are used rather than a mileage reimbursement, then the taxable income for the employee can be reduced slightly. But with only eight percent business use, not much can be done here. Sales Rep 1 and 2 The vehicles, costs, total miles and business miles are similar for the Sales Reps. The difference is the car allowance: Sales Rep 1 gets $500 per month while Sales Rep 2 gets $700. We did an analysis of three-, four- and five-year leases in the business name, with the employees reimbursing the company for personal use of the vehicle. Chart 2 shows the costs under the various scenarios. A five-year lease would cost the company $8,172 per year, a four-year lease would cost the company $9,200 per year and a three-year lease would cost the company $9,730 per year. It isn’t going to cost the company much more to provide newer, more reliable vehicles in the company name for the sales reps over giving them a car allowance. This is also where the non-financial benefits of a company-owned or leased vehicle, such as employee retention and company image, come more into play. It makes sense to lease these vehicles in the company name.
Sales Manager
The Sales Manager’s situation is similar to the Sales Reps’. She has the same type of vehicle and gets a $500 per month car allowance. However, she drives slightly more miles, 29,000 per year, but has a much lower percentage of business use, 35 percent, than the Sales Reps’ 68 percent. Under the current scenario, with a $500 car allowance and only 10,000 business miles per year, she will have about $2000 added to her W2 each year as income. The company could look at putting the vehicle in the business name and have the employee reimburse the company for the personal use. However, at 65 percent personal use, the amount she would owe back to the company is almost as much as she’d be paying on a loan.
How much your company spends for the business use of vehicles is only one part of the lease, purchase or reimburse question. Non-monetary factors such as company image, hiring and retention issues, employee morale, productivity and liability exposure complete the answer. Yet calculating your hard-dollar outlays is the right place to start. By knowing how much you’ll pay in each scenario, you can better understand the value of those intangibles and make a more informed decision.
Our financial experts recommended only slight adjustments to the way Carolina Ceramics paid for the business use of its vehicles. However, those small changes could save the company good money.
Chris Brown
Associate Publisher
As associate publisher of Automotive Fleet, Auto Rental News, and Fleet Forward, Chris Brown covers all aspects of fleets, transportation, and mobility.
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