In the evolving landscape of fleet management, the challenge of budgeting for fleet vehicles is more pronounced than ever.
Factors such as inflation, complex regulations, and escalating costs of goods and services play a significant role. This is particularly pertinent for fleets where employees use personal vehicles for business and are entitled to mileage reimbursement.
Examining the Efficiency of Mileage Reimbursement
As of 2023, the standard mileage reimbursement rate for professional drivers using personal vehicles for work stood at 65.5 cents per mile.
Industry experts often debate the adequacy of this rate, and the discussion is gaining momentum with the rate set to increase to 67 cents per mile in 2024.
While seemingly minor, this increment may not adequately address the unique needs of large fleets comprising private vehicle-driving workers.
Consider a professional driver covering over 50,000 miles annually. With strategic financial management, the current reimbursement rate could potentially cover replacing their vehicle every year or two, considering that the total annual reimbursement for this mileage exceeds $32,700.
This raises a critical concern: the current IRS rate might lead to overcompensation for professional drivers, rendering it an inefficient reimbursement strategy.
Further complicating this is the provision of unlimited fuel cards to drivers, potentially leading to less conscientious driving behavior.
Combined with a high per-mile reimbursement rate, this could inadvertently encourage inefficiencies in route selection, ultimately impacting time management, productivity, and customer satisfaction.
Unraveling the Financial Strain on Businesses
The incremental increase to 67 cents per mile in 2024, while beneficial on the surface for some, may result in substantial financial burdens for businesses that pay this flat mileage rate to all employees.
By adhering to this rate for high-mileage drivers, companies may find themselves compensating employees far beyond the actual costs incurred, leading to thousands of dollars in unnecessary expenditures annually.
This scenario is especially pronounced in businesses where driving is a significant operation component.
This presents a critical juncture for business owners and fleet managers to reassess reimbursement strategies to avoid such financial inefficiencies.
The Fixed and Variable Rate (FAVR) reimbursement model is a viable alternative to the standard IRS mileage rate. This model offers a more tailored approach, aligning reimbursement more closely with the costs employees incur for business use of their vehicles.
FAVR accounts for both the fixed costs (such as insurance, taxes, and depreciation) and the variable costs (including fuel, maintenance, and tire wear) associated with vehicle operation relative to an employee’s specific location.
This dual-component structure allows for a more accurate reflection of the true costs of using a personal vehicle for business purposes. By adopting FAVR, businesses can ensure that employees are fairly reimbursed without the risk of overpaying, finding the true balance.
Critical Evaluation in the Face of Incremental Rates
The benefits of FAVR extend to both the company and the employee. For businesses, this model offers a more cost-effective approach, potentially saving thousands of dollars that would otherwise be spent on inflated mileage reimbursements.
For employees, FAVR provides a reimbursement that more accurately reflects their actual vehicle expenses, ensuring fair payment and increasing employee morale, all while being tax-free.
In conclusion, as the IRS mileage rate increases, business owners and fleet managers must evaluate their reimbursement strategies critically.
Transitioning frequent drivers to the FAVR model safeguards against financial inefficiencies and promotes fairness and accuracy in employee reimbursement.
This strategic shift in reimbursement methodology can contribute significantly to the financial health and operational efficiency of businesses reliant on a mobile workforce.
About the Author: Lee Adam is a Product Marketing Manager at Cardata.Cardata is founded by ex-fleet executives who saw a need for a better way to reimburse mileage and run vehicle programs.