The Tax Cuts and Jobs Act (TCJA), which became law on Jan. 1, 2018, eliminated the ability to deduct unreimbursed employee expenses, including eligible vehicle expenses, on personal income tax returns. Prior to the tax law change, if employees itemized deductions, they could deduct unreimbursed business expenses on the amount that exceeded 2% of their adjusted gross income.
It is important to note that the fixed and variable rate (FAVR) regulation and tax code provisions surrounding accountable plans have not been changed. The FAVR program remains as-is under the new tax law. Similarly, mileage reimbursement programs, commonly referred to as cent-per-mile (CPM) programs, also remain unchanged under the new tax law.
Accountable vs. Non-Accountable Plans
There are two types of vehicle reimbursement plans – “accountable” and “non-accountable.” Under a non-accountable plan, reimbursements, stipends, and allowances are taxable and the burden of substantiating deductible expenses is on the employee. Prior to the TCJA, non-accountable plans were not advantageous to employees who could not itemize personal tax deductions. Now, under the TCJA, stipends, allowances, and reimbursements are also undesirable for employees who itemize because unreimbursed vehicle expenses are no longer personally deductible.
Under an accountable plan, employee business reimbursement policies comply with IRS regulations and are not taxable. Using an accountable plan, employees submit receipts or mileage logs to be reimbursed for the expenses they incur. Under TCJA, the accountable plan rules remain unchanged, thus, a mileage reimbursement or FAVR accountable plan continue to allow employers to reimburse employees for business use of personal vehicles without creating taxable income for them.
The simplest of these two programs to administer is a one-size-fits-all mileage reimbursement or “cents-per-mile” plan using the IRS safe harbor rate, which is currently 54.5 cents per mile. For more accurate reimbursement that accounts for geographical differences in operation costs, vehicle type, and mileage driven, the more complex FAVR plan is preferred.
Top Performers are Complaining
The TCJA creates a problem for employers who use a non-accountable vehicle reimbursement plan as the elimination of the ability to deduct unreimbursed vehicle business expenses is viewed by employees as a cut in income. Negative feedback has some companies reconsidering the viability of offering company-provided vehicles to help key employees mitigate the adverse impact the loss of the tax deduction has caused.
Following the effective date of the new tax law, some fleet management companies (FMCs) reported an increase in RFPs from companies (that traditionally reimburse employees) for quotes on the cost to offer a company-provided vehicle program. One such FMC is Merchants Fleet Management.
“We’ve seen a flood of requests from smaller companies because the new tax change is affecting many of their salespeople and top executives and they are looking for an alternative,” said Todd Welle, general manager business leasing services, Merchants Fleet Management. “To some employees, losing this deduction is seen as a cut in income. In a tight labor market you don’t want to give valuable employees a reason to be disgruntled. It is easier and better to retain your top employees than find new ones. In a job market where there is competition for quality talent, it is important to eliminate policies that unncecesarily cause dissatisfaction.”
Another factor causing reimbursed fleets to take a second look at offering a company-provided vehicle program is the strength of the economy.
“As the companies are growing, they’re thinking down the road. While they may not have enough eligible employees right now that would make sense to offer a company-provided fleet, they are proactively investigating the cost to transition to a company-provided fleet program,” said Welle. “When you look at a smaller reimbursed fleet of fewer than 100 vehicles, they’re now facing pushback from their top-performing salespeople who are driving their own vehicles to do their jobs. In the past, this wasn’t an issue since employees were able to deduct some these non-reimbursed vehicle business expenses as an itemized deduction. Now employees see the loss of the deduction as a pay cut.”
In the current tax environment, a growing number of employees feel their companies are not adequately reimbursing them for the use of their personal vehicles for business purposes and, in some cases, their management is listening. “It’s almost always a VP of HR or VP of sales coming to us and saying we’ve made the decision to give our employees company vehicles,” said Welle.
Worth the Analysis
For companies that traditionally reimburse employees, the message is that it’s always worthwhile to periodically perform a reimbursement vs. company-provided vehicle analysis. “Transitioning from employee reimbursement to a company-provided vehicle fleet is a really big decision. It’s a change in philosophy and approach, especially in small, emerging companies,” said Welle. “But, it’s worth the analysis. If your company’s growth is flat or if it is divesting, it’s best to stay with reimbursement because you don’t want to start up a fleet program in that type of environment.”
The next 12 months will reveal the true impact of the tax code change on how companies approach reimbursement. “Some companies are taking the lead and being proactive in this decision making. Other companies are not yet aware of the change. But, we’re definitely feeling a change in the marketplace,” said Welle.
Let me know what you think.
Originally posted on Automotive Fleet