With gas prices roughly 50 cents per gallon higher than this time last year, costs are escalating for everyone, but companies that reimburse employees using personal vehicles for business with fixed mileage rates—the vast majority—in most cases are leaving their travelers holding the bag. If fuel costs were suddenly to abate, companies might find themselves reimbursing employees more than actual costs. This double-edge sword underscores the perils of using a fixed rate to reimburse variable costs.
The Internal Revenue Service does not adjust the annual rate, currently 37.5 cents per mile, which it contracts travel management consulting firm Runzheimer International to set late each year.
"The IRS rate is not going to be updated until Jan. 1, so companies that do use it are frozen and they can't do a whole lot unless they go above it, in which case it's taxable," said Lee Czarapata, director of client relations at Runzheimer International.
As variable costs for operating a car, namely gas, rise to high levels, the burden of paying for any discrepancy between the fixed rate and fluctuating costs falls on the travelers or the companies.
When asked if her company uses the IRS reimbursable rate to repay drivers, one travel manager said, "Yes, and we eat the variable expenses when gas prices go up."
Several travel managers indicated that the practice of using the flat rate is widespread throughout the industry. "I think almost all corporations use that mileage rate as a reimbursement tool for employees who use personal vehicles on company business," National Business Travel Association president and director of corporate travel for the Burlington Northern and Santa Fe Railway Co. Carol Devine said.
Yet, pervasive practices do not always correlate into best practices. According to Runzheimer and IRS, the rate is not intended to be the standard for reimbursement that it has become. "The IRS rate was never meant to be a reimbursement number, but I don't know if anybody knows that," Czarapata said. "It's meant to be a safe harbor tax deduction guideline for people who don't keep receipts. So if you're a businessperson and you don't keep receipts on your vehicle you can use your 37.5 cents to deduct mileage on your 2106 form."
The 37.5 cents per mile rate—which last year was raised 1.5 cents over the 2003 rate based primarily on higher gas prices
(BTN, Oct. 27, 2003)—is actually a blend of the fixed and variable costs associated with operating a vehicle.
"The fixed amount covers things like insurance and depreciation and then a variable rate covers fuel, oil, maintenance and tires," according to Czarapata. However, variance of actual costs hinge on a variety of criteria, including regional gas prices, insurance rates and car types, among others. "The IRS rate is meant as a very vanilla, cross-country, nationwide rate," Czarapata said. "However, if I have a midsize four-door sedan and drive that around Birmingham, the costs are about three times less than if I drive it in New York City or Detroit or San Diego or Miami. So having one rate fit all is not a good idea."
As testament to the variance of regional price fluctuations, last Friday's average gas prices across the country ranged from $2.33 on the West Coast to $1.94 in the Southwest, according to AAA.
Although Runzheimer and IRS encourage the actual variable and fixed costs—and the documentation that entails—IRS does allow Corporate America to use the rate for reimbursements.
IRS late last year, through a shift in its rules, allowed even more businesses to use the "safe harbor" rate to avoid maintaining detailed records and receipts to verify actual costs. IRS estimated that small businesses would save 8 million to 10 million hours every year in record keeping by using its recommended safe harbor rate in lieu of documenting actuals.
While many companies use the flat rate, such companies as Xerox and Bar S Foods have devised systems to use Runzheimer data to help calculate the actual variable and fixed costs associated with operating a car on a monthly and regional basis.
Xerox manager of customer service and satisfaction Helen Kuhn developed with IBM an in-house system that automatically determines these fluctuations. Kuhn said she updates the Auto-Equity system on a regular basis to reflect cost changes over time and also uses 86 different cost centers to reflect fixed and variable costs by region, car type and other factors that can affect the actual reimbursable rate
(BTN, April 28, 2003). Roughly 7,000 Xerox employees, who drive more than 500 miles per month, used the system last year. Kuhn said the Auto-Equity module has saved Xerox an estimated 15 percent to 20 percent, or roughly $5 million annually, compared with prior practices.
"We have 86 different cost areas or different cities in the United States and Puerto Rico where we have the majority of our drivers. We look at those 86 cities and what the fixed cost is for the driver in those locations," Kuhn said. "What is the cost of insurance, for example? The cost of insurance in Nashville is pretty reasonable, but when you get out to San Francisco or Los Angeles, the cost is exorbitant. So you want to make sure you're reimbursing the driver based upon the cost in their geography."
Phoenix-based Bar S Foods has been using Runzheimer numbers for nearly one decade and about two years ago began using the regularly updated rates in conjunction with its Concur Expense reporting system. "Typically, we evaluate the variable costs quarterly," said Dave McEldowney, Bar S Foods director of information systems, "but now it's even more frequent with the way gas prices have been." McEldowney said drivers, when filing expenses, put in the total number of business miles driven into the expense reporting system, and then the actual fixed and variable rates are determined.
"Keep in mind, if a vehicle on the road is producing 20 miles per gallon performance—and that's about the average—for every 20 cents gas goes up per gallon, it's a penny more per mile," Runzheimer's Czarapata said. "If it goes up 40 cents a gallon on average, driving 500 miles means you're going to spend $10 more. Is that going to stop anyone from traveling?
"Nobody here's going broke," Czarapata continued. "I'm not trying to belittle the effects of this because if you're in a service industry, like a delivery company or a transportation company or even the airlines, these gas prices are killers. When you're looking at it from a business perspective, it's a big deal."