automotive fleet & leasing association white paper series ∙ volume 22
PERSONAL USE CHARGE
Personal Use Charge
by GE Capital Soultions Fleet Services If your fleet policy allows for your employees to use companyprovided vehicles for their own personal use — anything from every day commuting to driving cross-country on vacation — then you should consider implementing a personal use charge. Even if you have already adopted a personal use charge, this information may help you maximize the benefits of your program. Implementing a personal use charge should be a first strategy for any fleet. No other single tactic can reduce your fleet expense by as much. Properly structured, a personal use charge can often reduce fleet expenses by 20 percent or more. If you aren’t taking advantage of this strategy you’re missing a huge opportunity. What is a personal use charge? A personal use charge is a payment from the employee to the employer, reimbursing the company for the drivers’ personal use of a company provided vehicle. Personal use is defined simply as any use of an employer provided vehicle that is not directly to the benefit of the employer. The amount of the reimbursement or repayment can be structured to solely move the actual expense of operating the vehicle back to the true business cost, or it may be used to drive other results.
driver must pay FICA on the benefit. The taxes can approach 40 percent of the benefit. Of course, paying the taxes owed is still less expensive than paying for the benefit, but most drivers don’t make withholding adjustments for the value of the personal use and may end up owing anywhere from a few hundred to a thousand dollars of additional tax each year. Around April 15th each year the benefits of a “free” vehicle may not look so appealing. Although drivers can adjust their withholding by revising their W-4 and submitting it to their payroll department, most don’t and they end up with an unpleasant tax bill. A personal use charge can reduce or eliminate this problem by deducting a flat amount from each paycheck. Money never seen is seldom missed and if the deduction is sufficient to cover the personal use there is no additional tax due at year-end for this benefit.
A personal use charge can be your biggest fleet savings opportunity.
Why is this a benefit to my company and my drivers? As stated above, a personal use charge can benefit the company by reducing the overall fleet expense and returning the company back to their true business cost. Less obvious is why this is a benefit to the employee who has to pay it. The company could, for example, 1) provide a car and not charge the driver anything for the personal use or 2) provide a car and charge the driver for their personal use. Most drivers would choose option 1 but there is a downside called the Taxable Fringe Benefit. The benefit of the personal use is taxable to the driver as if it had been paid to them as regular wages. Not only does the driver have to pay federal, state and local income taxes, but BOTH the company and the
Although the employee is now paying the actual cost for the vehicle usage, it is still much less than the actual cost of owning and maintaining a personal vehicle. The employee benefits from the company’s purchasing power to drive a vehicle less expensively than they could on their own, as well as any insurance and maintenance savings that the employer and the leasing company may be able to negotiate. Additionally, they have no down payment to deal with, no business use insurance costs and no credit reduction from an outstanding car loan. How to calculate a personal use charge that covers the company’s costs A personal use charge should reimburse the company for the appropriate amount of vehicle costs. While there are a number of ways to come up with a number, we can determine the amount by calculating the total cost to operate a vehicle over its life and dividing that by the total number of miles driven over the vehicle’s life. Let’s do a simple example. Let’s assume a typical sedan has an invoice amount of $18,000 and sells for $6,500 after 3 years and 75,000 miles of use. Depreciation cost is therefore $18,000 less $6,500 or $11,500. To that you would add the loan or lease interest, taxes, fees,
insurance and registrations. Assume that is another $6,500, but you should look through your records to see what your costs really add up to. This gives you a total fixed cost of $11,500 + $6,500 or $18,000 in total. Now add up the tolls, fuel, tires, repairs and any other maintenance that the company paid for on that vehicle, estimating another $6,500 giving you a total life-cycle vehicle operating cost of $24,500. Dividing the cost of $24,500 by the 36-month expected life gives an average cost of $680 per month. If your employee historically reports 20 percent personal use, a personal use charge of $680 x 20 percent or $136 per month would completely cover the cost of the personal use. Your employee could not provide, insure, maintain, and fuel their own vehicle for $136 per month. IRS perspective The $136 covers the company’s costs, but is it enough to meet IRS requirements? The IRS doesn’t look to actual fleet expenses to assign a value to the personal use; rather they will use the Annual Lease Value (ALV) table in most cases. Let’s assume your vehicle has a factory invoice cost of $18,000. The IRS requires a 4 percent markup to determine the fair market value of the vehicle; $18,720. Once the fair market value is calculated, the ALV table is used to determine the annual value, in this case $5,100. Since your records show 20 percent personal use, the value is 20 percent of the table amount or $1,020. The ALV table covers everything related to the vehicle except fuel. Fuel is covered separately. If the driver charged $2,000 for fuel expenses for that vehicle, then add 20 percent of the actual cost or $400 to the driver’s portion. The value of the personal use is now $1,020 + $400 = $1,420. Dividing that by 12 will show $118 per month as the value for the personal use of the vehicle, under the ALV method. As long as the driver pays $118, or more, per month in a personal use charge, the driver will not have imputed income related to their personal use. The $136 charge should completely cover both the company’s costs and eliminate any taxable benefit issues for the driver. Maximizing the benefits When employees participate in paying for something they get a sense of ownership and are more likely to take care of the
vehicle over its life. They are also more likely to buy it when the company decides to replace it with another vehicle. This provides two benefits for the company; 1) a well cared for vehicle is worth more when you are ready to replace it, and 2) drivers will commonly pay more for a vehicle than you can get at auction. Both result in additional cost savings to your total fleet expense. Another way to reduce costs using the personal use charge is to allow drivers to upgrade their vehicle by paying the additional cost as part of their personal use charge. Let’s assume your driver wants a Jeep Liberty Sport instead of a Taurus sedan. If the total life-cycle cost for the Jeep is $26,000 (compared with the $24,500 we calculated earlier for the Taurus.) The difference is $1,500 or $42 per month over the 36-month term. By charging the driver an additional $42 each month ($178 in total) the company’s costs are covered and the driver is happy because they get the vehicle they want. The Jeep would likely cost the driver three to four times more than the $178 each month if they purchased it on their own so this is a good deal for them. Drivers are more likely to buy the vehicle at full term and less likely to leave the company since they would give up the opportunity to buy the vehicle. Employee retention and morale is better without costing the company extra dollars. If this all seems rather confusing and you want to discuss it more, or you just want to check your numbers, ask GE Fleet Services for assistance. We can help you walk through this exercise and can provide portfolio averages when you don’t have specific data from your own fleet. Summary Between commuting, shopping, errands and vacations, most drivers will put at least 20 percent personal miles on their vehicle. Whatever the real percentage is, they should be paying the appropriate percentage of that vehicle’s operating costs. It reduces their year-end taxes and when handled as a payroll deduction, it’s painless for both the employer and employee. No other fleet cost-reduction strategy can save as much with as little effort while at the same time increasing employee morale and retention. n