Vehicles, new or used, are expensive to get right now, and unfortunately, there's no end in sight. Costs have skyrocketed as demand for cars has increased and supply has decreased. A whopping 9.5 million vehicles worldwide are predicted to be lost because of the chip shortage, according to AutoForecast Solutions.
This issue is particularly painful for beer distribution companies, who are dealing with rising costs at scale. This volatility has led many distributors to reconsider their current company vehicle program for sales reps and merchandisers.
In 2021, managing a fleet comes with issues ranging from administrative burden to increasing costs. Companies have been attracted to company-owned cars in the past because they’re a straightforward option for managing mileage and considered a nice employee perk.
Increasingly, this is not the case though. As costs rise, mileage technology advances and workforce preferences change, fleets are not the obvious choice they once were.
What options do you have?
With this in mind, there are two main options we at Everlance hear companies considering.
Some are choosing to wait for new vehicles. They've accepted that their insurance costs and liability will rise because employees are driving older cars.
Others are choosing to dispose of their fleet while the market's hot. They transition to a mileage reimbursement model with employees driving their own car for work.
There's more than one consideration that comes into play when making the right decision for your team. So let’s take a deeper look at the issues related to making such a decision.
Are your leases almost up?
Good news—you're in the green! When the lease ends, you can likely buy out your vehicles at less than their actual market value. Data from the Bureau of Labor Statistics shows used cars cost 45.2% more in June 2021 than in June 2020 on the open market.
This doesn't happen often, so take advantage of the opportunity. Then give employees the opportunity to purchase them for only what you paid, a nice benefit as part of your transition to a personal vehicle reimbursement program.
Is your fleet company-owned?
As with leased vehicles, you have equity in your fleet that you can share with employees if they want to buy their company car from you. This way, employees can actually get their hands on a vehicle and immediately have equity in it.
Plus, you’ll no longer have to purchase insurance for all those cars. If you move to a Fixed & Variable Rate (FAVR) reimbursement model, you’ll also be reducing your risk exposure. For any accidents that occur, the employee’s insurance will kick in first.
What are the tax consequences of disposing?
While it's great to sit in the green if you sell your vehicles, the IRS will want their fair share. So make sure you’re aware of the potential recapture of the depreciation you’ve been deducting. In addition, the cars are likely worth more than you thought when you filed your taxes.
Keep employees happy
Some leaders may be concerned that employees will be upset about losing their company car. However, what many employees value has changed.
Fleets require employees to drive a company car. By transitioning away from a fleet, you give them freedom to choose their own car. Today’s workforce—especially millennials and Gen-Zs—highly value this flexibility. In fact, it’s key to attracting and retaining employees in a tough labor market, as Harry Schuhmacher of Beer Business Daily recently shared at Encompass Connect.
That doesn’t mean you lose control though. With more sophisticated reimbursement models, you can still ensure employees drive a vehicle that aligns with your brand.
An exchange, not a loss
Transitioning away from a fleet doesn’t mean that employees lose benefits. Instead, it is a switch of benefits, from a company-owned car to employee-owned vehicle reimbursement. There are two IRS compliant programs, Cents-per-Mile (CPM) and Fixed and Variable Rate (FAVR), that put money back in employees' pockets for using their personal vehicle for work, tax-free.
In the past year, we’ve heard many companies are reevaluating their vehicle program options altogether. For the first time in years, they are asking themselves questions like, “How can we design a flexible program that can adapt to changing costs?,” “Can we reduce the administrative burden that mileage management creates?;” and “What does fair reimbursement look like?”
While these questions aren’t easy to answer, they are worth considering. Investing time to reconsider your program now will ultimately save your team time, money, and headache down the road.
Our experts would be happy to help discuss your options. Click here to schedule a meeting with someone from our team.