The government allows 40.5 cents a mile reimbursement for business-related driving. The AAA estimates it costs an average of 56.1 cents per mile to operate a motor vehicle traveling 15,000 miles in 2005. It looks like Uncle Sam is understating the true costs to operate a vehicle, doesn’t it? Even the least expensive car AAA analyzed—the 2005 Cavalier at 20,000 miles per year—is more expensive to operate per mile than the IRS’s average. Both calculate the same expenses: gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation or lease payments. The major discrepancy lies in depreciation. Deciphering IRS Revenue Procedure 2004-64 (don’t waste your time on sleeping pills) shows that the government calculates 15 cents for operating expenses, 8.5 cents for insurance, license and registration and 17 cents for depreciation. Why so little? Perhaps because the IRS must factor in the seven-year-old beater with little value and a paltry cost per mile along with newer models. It’s safe to say, at least for fleets that use late-model vehicles, that the AAA figures are closer to reality. (Yet they’re still low—AAA calculates gas at $1.93 a gallon.) We took the analysis a step further. We calculated costs per mile for four vehicles, leased and purchased, and compared actual expense versus mileage reimbursements. We assumed that our drivers own or lease their vehicles, drive 20,000 average miles per year and have 80 percent business use. The vehicles are under a four-year term and will be traded in. We’re a corporation. {+PAGEBREAK+} The leased Mercedes and the Ram and Tahoe show the most dramatic differences between per-mile and actual-expense reimbursement. The trucks have such a discrepancy because we’re allowed to depreciate a greater dollar amount for light trucks over 6,000 GVWR under Section 179. (Yet if the drivers sold the trucks instead of trading them in, they’d realize a gain that would lessen the amount of savings.) Come salary review time, take a look at switching to actual-expense reimbursement. Remember that reimbursement, unlike salary, is tax-free money. Assuming a 35 percent tax bracket, taking actual on the leased Mercedes puts $5,672.45 back in your vice president’s pocket! (Note though that for leases you can only switch methods in year one.) For the purchased Tahoe, your sales manager sees $6,249 more. But the big issue has always been collecting those expenses, right? It’s not that hard once you figure out where to get the information. Keeping the mileage logbook is the bigger hassle—but you’ll need that for any type of reimbursement. Is your bookkeeper the type that revolts when saddled with extra work? Then stick to the 40.5 cents reimbursement. But at least do this: look at your vehicle and how many business miles you drive. How much money will you save by taking actual expenses? If you own the company, put that money in your pocket.