Late last year, Congress passed, and President Trump signed, the Tax Cuts and Jobs Act (TCJA) of 2017. While the full impact of these changes has not yet been felt, any company that is dependent on a mobile workforce should carefully evaluate the potential impact and their strategy around company transportation.
The Potential Impact
The TCJA was enacted to simplify tax compliance and reduce taxes to promote economic growth. Under it, itemized deductions (that is, expenses reported on a 1040, Schedule A) for individuals were eliminated, or limited. Two areas that aﬀect employees the most are the inability to deduct unreimbursed employee expenses and the $10,000 state and local tax (SALT) deduction limit.
A popular unreimbursed employee expense is business use of an automobile. Prior to 2018, employees could deduct unreimbursed work expenses that exceeded 2% of adjusted gross income (AGI).
Accordingly, many companies found it easy to provide a taxable stipend or car allowance, knowing employees could deduct either the standard mileage rate or actual vehicle expenses, such as lease payments, depreciation, insurance, maintenance and gasoline, incurred in performing their jobs.
Employees, in turn, had the ﬂexibility to drive what they wanted while employers were able to control costs by providing a ﬁxed amount.
Under the new tax laws, the car allowance continues to be taxable, but without the oﬀsetting deduction, resulting in many employees feeling as though they are taking a pay cut.
In states where vehicles are subject to annual property or ad valorum taxes, the employee has also lost the ability to deduct the taxes if their income and real estate taxes exceed $10,000. And so, what was once thought of as a desirable perk is now viewed by some as a burden.
Company Vehicles, A Win-Win
To retain and attract employees, especially in a saturated job market, companies are seriously rethinking how they reimburse business expenses. The TJCA places no new restrictions on businesses for its expenses, or state and local taxes.
Some organizations with a mobile workforce are using company-provided vehicles as a way to mitigate the impact that the loss of itemized business deductions has on employees. Working with a ﬂeet management provider, businesses can provide a quality ﬂeet, retain a desirable employee beneﬁt and still control costs.
In addition, the company beneﬁts from increased control over costs, as all the vehicle expenses are more easily tracked and veriﬁable as truly business-related. Organizations can ensure they have the right vehicle mix for the job, know that employees are in reliable transportation and can even be conﬁdent that employees are showing up in a vehicle that represents the company well.
What Is the Right Move for Your Organization?
Implementing a company ﬂeet program is an important decision. Any consideration of this option should include factors such as company growth, the number of employees using vehicles for business, history of reimbursement costs and employee feedback.
Even if a company ﬂeet program is not right for your organization, it is clear that car allowances and stipends need to be replaced with an accountable plan that either provides reimbursement based on the IRS standard mileage rate (currently 54.5 cents per mile) or by having employees submit documentation and mileage logs that support reimbursable vehicle expenses.
While such accountable reimbursements are not taxable to the employee, they do shift the administrative burden to the employer. Records need to be retained for at least three years. An inability to support the claim that a reimbursement is for a valid business use means either a disallowance of the deduction or subjecting it to payroll taxes.
If you do want to move away from vehicle reimbursements and ﬁnd the idea of a company-provided solution attractive, you should consider the types of jobs demanded of your mobile workforce and what a ﬂeet model might look like, given your particular scenario. Questions to take into consideration include:
- How many vehicles and what types do you think you need?
- How many heavy users do you have and what does their annual mileage usage look like?
- Does buying or leasing make more sense?
- Could a pooling model work for your company, one in which employees share vehicles?
- Would augmenting with additional vehicles short-term to meet seasonal or project needs be more advantageous?
- Would you set up programs such as fuel cards and maintenance contracts?
- Would you manage the ﬂeet yourself or work with a ﬂeet management company?
Evaluating the Options
Even if you think you might self-manage a ﬂeet or implement an accountable plan for reimbursements, it would be worth your time to speak with a ﬂeet management company (FMC) to understand what they can oﬀer, including how they can help keep costs down.
Obviously, the capital expense of acquiring vehicles is a signiﬁcant part of the decision-making process. A good FMC will be able to oﬀer diﬀerent structures that may be much more cost-eﬀective than going it on your own.
Ultimately, with the major changes to the tax law, any company that is dependent on a mobile workforce should carefully evaluate the potential adverse impact of the new tax law on its employees and decide if it is time to make a change.