The Tax-Free Car Allowance is a reimbursement program for employees who drive their personal vehicle for work. It is easy and tax-efficient!
Hybrid programs: tax-free reimbursements, no matter what you drive.
Hybrid reimbursement programs allow drivers to keep their used cars and still get reimbursed tax-free. That is ideal because new cars are expensive now!
Vehicle reimbursement programs and rising new and used car costs.
What is driving up car prices?
Chip shortages and the ensuing supply chain backlogs are causing hikes in new car prices. Production of the microchips that companies need in order to build cars was curtailed during the pandemic. Modern cars need thousands of these chips for the operation of their complex systems.
Demand for cars surged back earlier than expected, leaving automakers scrambling for microchips. Intel, a microchip manufacturer, has said that it could take until 2023 for supply to catch up again.
There has also lately been a shortage of workers in the automotive industry. In October of last year, there were more than a half million unfilled auto manufacturing jobs. If car assembly plants need three thousand workers, this means the output capacity of nearly 200 factories is currently idle.
JD Power says there were 21.5% fewer cars sold in April of this year compared to 2021.
What are the effects of this?
Because of these issues, the prices of new and used cars are rising and staying high.
The used car market will remain unstable and elevated if the new car market does—and every indication is that it will. Year over year, new car inventory is down 58%. In Indiana, there has been a 63% drop in new vehicle inventory, comparing March 2021 to March 2022.
American manufacturers are managing to maintain levels better than imports (Subaru inventory has fallen a shocking 96% year over year), but still most manufacturers are shipping at least 50% fewer cars than this time last year.
Less supply, same demand. As covid restrictions have eased, people have naturally taken to the road in greater numbers, pushing demand for cars back up. The average price of a new car has risen 22.3% year over year. The average price on April 27th 2021 was $35,400, but on April 25th 2022, a new vehicle would on average have cost you $44,888. Ten thousand extra dollars for the same product is not a trivial increase.
That means used car costs are going to stay elevated. Outpacing new cars, we have seen a year over year change of nearly 25%. This has brought the price of your average used car up from nearly $23,000 to nearly $34,000, April ‘21 to April ‘22.
Average used car price April '21 vs. April '22. Data from Foureyes.io
Some data from other states:
In New Mexico, there were 93% fewer BMWs sold this April than last.
In New Jersey, there 80% fewer Buicks were inventoried year over year.
In North Carolina, new Chrysler sales were down 65% year over year.
What does this mean for people who drive for work?
The simple conclusion from this data is this: it is probably cheaper to keep your existing car on the road than to buy a new one.
Even if your car needs some repairs, it might still be a good choice to keep your old one. It could cost as much as $1,800 per year to maintain your car if everything is in decent condition and you drive 20,000 miles per year. That means, however, that the money needed to pay for the average used motor vehicle is could pay 18.7 years of maintenance.
As long as you are not facing any major, transmission-tier repairs, keeping your existing car might be the right choice.
Do I need to buy a new car if I’m on a vehicle reimbursement program?
Almost certainly not. There are some vehicle reimbursement programs—like Fixed and Variable Rate (“FAVR”)—that include depreciation in their reimbursement calculations. That is, you are reimbursed in part, on such a program, for the expense of your car depreciating. When the car is fully depreciated, you stop being reimbursed for that expense. If this happens in the middle of the year, but you continue being reimbursed as if your car was not yet fully depreciated, you could see some tax.
Reimbursement programs are designed to be tax-free, but having a fully depreciated car is one of the rare instances in which tax might actually apply to your reimbursement. You also might be treated as if you were on a different program called Tax-Free Car Allowance ("TFCA")—but this is not a big deal. Cardata uses a variety of IRS-compliant tools to consistently minimize driver tax burdens, including treating depreciated cars as reimbursable under the TFCA scheme. That is because to qualify for FAVR, your car has to be relatively new. There is something called a “retention cycle” which basically means ‘the length of time you can drive a given car on a FAVR program.’
The tax burden of Tax-Free Car Allowance is still significantly lighter than a normal, taxable allowance. So while there are some small shifts in the specifications of your reimbursement arrangement, these mostly happen behind the scenes. There could be some tax deducted from a driver’s paycheck, but Cardata works hard in conjunction with employers to minimize this as much as possible.
So while there are some small shifts in the specifications of your reimbursement arrangement, these mostly happen behind the scenes. There could be some tax deducted from a driver’s paycheck, but Cardata works hard to minimize this as much as possible.
What are hybrid programs?
A hybrid program is just what I have been describing: a combination of vehicle reimbursement programs that allows drivers to adapt to fluctuating prices in the cost of owning an automobile.
The best thing about a hybrid program, in this context, is that drivers do not have to buy new cars in order to keep their tax-free reimbursements. As we said above, if you come out of compliance with a FAVR program, you are simply treated as if you were on a TFCA program.
Another program exists for when a driver’s habits change. Sometimes a sales rep will change to a different role within the company-perhaps they become a director-in which case they will drive far less often for work. Occasional drivers are best served by a Cents per Mile (“CPM”) program. On a hybrid reimbursement plan, a driver who needs to adjust their mileage to a lower range can easily transition to CPM. This switch is just as easy as that from FAVR to TFCA.
Hybrid programs shield drivers from volatile driving costs. We are often asked by sales reps whether they need to buy a new car once theirs is fully depreciated, since FAVR program compliance requires newer cars. The answer is no. The answer is a hybrid program.
Do you own or lease a fleet of company cars? Fleets are the wrong business to be in when car prices are surging. If you have been replacing old with new vehicles in the last couple of years, we empathize. This is an expensive time to be in the car business.
Switching to a vehicle reimbursement program could significantly reduce the costs of your operations. And losing the fleet now might not be a bad long-term play, if higher prices hold for the long term. Cox Automotive, for example, is looking ahead to a "new normal" of elevated costs. Moreover, inflation in the United States was 8.5% in March, driving up the costs of materials. A stabilization or decrease in the price of cars in the short term is unlikely.
Note also that, while supply is falling short, motor vehicles sales are generating in record profits, according to JD Power. This means that players in the industry actually have little incentive to meet demand. They may, conversely, be motivated to maintain this new status quo in the car market and keep prices high.
Now is a great time to get out of the car business. Lose the fleet; get a vehicle reimbursement program.
Car prices are not the only thing rising—and you know what I am about to mention: gas prices.
Luckily, Fixed and Variable Rate ("FAVR") programs also protect drivers and businesses from inflated gas prices. Check out this related article: