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Is it better for a small business to buy a fleet vehicle or offer a monthly vehicle stipend to employees?

Jeff Andrews's Profile

We're currently trying to decide which would be more advantageous, both from a tax perspective and from an employee's point of view.

Answers

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

Tax wise, it makes little difference. As long as you are following IRC in the business use of the vehicles involved, the business has a deductible expense. It doesn't matter if it is a fleet of business vehicles or reimbursement for business use of a personal vehicle.

The employee's point of view will vary. Many think they are "making buck" on IRS allowable mileage rates because it is more than the cost of the gas they burn. Whereas, if they understood the true cost of automobile operation, they are not.

Other employees like having a "company car" because they see it as a perk. However, if they are commuting or making other non-business use of it and, the company handles this in accordance with tax law to protect themselves, part of it becomes a taxable perk to the employee and then they aren't so happy about the perk.

From the employer perspective? Go with mileage reimbursement at the IRS allowed rates. It's cleaner, simpler and avoids tax liability issues since the employee must document their business use in order to obtain mileage reimbursement. Better yet, I promise it will cost you much less than any fleet. Autos are expensive. And, they create additional liability for the organization. A business is considered a deeper pocket target for a lawsuit than an individual. So, a minor accident with a corporate vehicle can turn into a nuisance lawsuit.

Plus, the use of business owned vehicles is frequently abused by employees. It's just human nature. What we don't have to pay for, we don't fully appreciate.

Having said all that I must add: In my long career that included business and individual income tax reporting, I can't tell you how many small businesses I've seen that owned and wrote off 100% of auto and truck expenses, frequently that are little more than the owner's personal, luxury vehicle, and get away with it. Even after several tax compliance audits. Most audit firms I know of, simply put a warning note in the file at the annual review directed to the business owner about the tax liabilities for doing this and let it go because the owners get so offended if the auditors try to explain business vs personal use and the tax consequences. Like so many income tax laws that make no sense to John Q, there are all kinds of false assumptions about the tax write off related to signage on the vehicle, carrying tools, commute vs business use, etc.

IMHO there is a reason we see so many expensive cars on the road today that has nothing to do with the personal wealth of the owners as much as the non-compliant business write off they are taking advantage of. Realtors, small business owners, commissioned sales people, independent contractors, franchisees: They all do it. And, they think that they are complying because, "They use it for business". But, they overlook the personal use aspect.

Anonymous
(Principal) |

Many thanks to Jeff for asking the question and "Anonymous" for the comprehensive response. I sit on a regional school committee board and have been confused by the seemingly large stipend the superintendent receives for auto use. ($600/month to offset the cost plus reimbursement for mileage outside the district and parking). If I follow your logic above, sounds like we may need to rethink that...

Robert Ewalt
Title: Exam Development Manager
Company: Institute of Certified Management Accoun..
(Exam Development Manager, Institute of Certified Management Accountants) |

There are companies in the business of leasing fleets of cars to businesses for sales people to use. They can do the maintenance, probably can buy at a better price than a smaller company. Try the car finance companies and/or the car rental companies to find leads in this area.

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