Personal Use Decreases Vehicle Resale Values

Personal use has an adverse impact on the resale value of fleet vehicles. There is a direct cost relationship between the number of personal miles allowed and the vehicle's ultimate resale value.

Personal use accounts for approximately 15% to 18% of the overall miles accumulated during a vehicle's service life. Each personal mile driven not only reduces a vehicle's residual value, but also shortens its service life by causing it to reach its optimal mileage replacement earlier. For instance, a commercial fleet intermediate sedan averages 24,000 miles per year. At an average personal use rate of 16%, a typical fleet sedan will add an additional 3,840 miles per year as a result of personal use. Commercial fleets, on average, keep intermediate sedans in service for 33 months.

If a typical fleet vehicle averages almost 4,000 personal miles per year, that means more than five months of a vehicle’s 33-month service life have been consumed by personal use. Likewise, if 16% of a fleet vehicle’s mileage is related to personal use, the life of maintenance “wear” items, such as tires, brakes, and belts, have correspondingly been shortened a like amount and need to be replaced, at company expense, earlier than normal.

While personal use averages 16%, outside market dynamics can cause personal use mileage to increase. For instance, when fuel prices increase, there is typically a spike in employees using fleet vehicles for personal use since the company pays for gasoline. Based on past periods of fuel price volatility, there is typically not a corresponding increase in reported personal use miles, just an overall increase in total miles driven. Bluntly, personal use miles are fraudulently under-reported.

For companies that allow drivers to take fleet vehicles home, but do not allow personal use, it is difficult to police unauthorized personal use by employees looking to reduce their “personal” fuel costs. The severity of the under-reporting seems to parallel price increases at the pump.

Sometimes employees and authorized family members use company vehicles to moonlight for a second job. Examples of unauthorized usage of company vehicles is working as an Uber or Lyft driver or holding a second job in part-time direct sales, such as Avon. Children of employees, who, as a family member, are authorized to drive a company vehicle have been known to use it as a pizza delivery vehicle.

Indirect Cost of Program Administration

Allowing personal use of company-provided vehicles is a common industry practice — about 87% of commercial fleets allow it. While there are a number of reasons favoring personal use of company-provided vehicles, there are numerous hidden costs.

There is an administrative cost to provide personal use as an employee benefit. Administering a personal use program is expensive, with internal costs ranging from $50-$90 per year per vehicle, depending on how a company manages the process.

The IRS requires every business to measure and report as income the extent of an employee’s compensation associated with the personal use of a company-provided vehicle, including the value of company-paid fuel. The process of calculating personal use taxable benefits is an end-of-the-year administrative headache. Personal use increases the company’s overhead by requiring significant program administration. Most personal use problems revolve around non-compliance in reporting personal use miles or fraudulently under-reporting personal use miles.

For instance, companies must monitor driver submission of personal use reports. For drivers who fail to submit a report, monthly notices must be sent as a reminder. Similarly, driver statements of personal use mileage must be periodically audited to ensure compliance and that drivers are keeping accurate business records of miles driven.

Many drivers are very meticulous about reporting personal use. However, the 80/20 rule applies to personal use administration. Every fleet manager has stories of drivers who simply can’t, or won’t, report personal use mileage on a regular or timely basis, despite numerous attempts (and threats) to get them to comply. Chasing after these scofflaws is extremely time-consuming and aggravating, diverting company personnel from their other responsibilities.

Another frequent problem with administering personal use reporting occurs when a driver works out of his or her home. Often, these employees report very little personal miles, arguing that the majority of vehicle use is from their “office” to a customer, a job site, or other business location. Personal use for employees who work from their homes is complicated because of the confusion over whether the first and last trip of the day is considered a business use trip or personal use.

The IRS says that commuting to work is personal use, not business use. Some employees working from a home office believe they are on a business trip anytime they leave their homes. But that’s not how it is defined in IRS regulations. Unless a home is the “primary place of business,” the first trip of the day is going to work, not leaving work. For a typical sales rep, the primary place of business is really the client’s office. Therefore, the first and last business trips are personal use.

The point is that administering a personal use taxable benefit program requires significant administration, which is an indirect cost often not factored into personal use chargeback calculations.

Capturing the Hidden Costs

As fleet manager, you need to know what it costs your company to provide personal use – not just the employee taxable benefit, but also the total cost to the company. It is important to consider not only all direct, but also indirect costs to offer this benefit. This includes the cost of fuel, maintenance, increased wear-and-tear, and program administration, along with risk exposure and increased vehicle depreciation.

As fleet manager, you must quantify the cost of each of these variables and calculate the total cents-per-mile cost by each vehicle type in the fleet. Once you have accomplished this, an accurate estimate for the “true” cost of personal use can be determined by multiplying this cents-per-mile cost by the average personal miles driven by employees.

Let me know what you think.

mike.antich@bobit.com

Originally posted on Automotive Fleet