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