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A few months ago, someone started a conversation on our LinkedIn about reimbursement for electric vehicles (EVs). This discussion got us thinking:
In this article, we'll cover these questions—and more!—so you have all the facts when you think about your business's vehicle program.
Throughout the discussion, when we talk about EVs, we’re referring to any vehicle that can be plugged in. That includes Battery Electric Vehicles (BEVs) and Plug-In Hybrid Electric Vehicles (PHEVs), which can run on both electric and gas power. These are in contrast to vehicles with an Internal Combustion Engine (ICE), whether they’re hybrid or purely gas-powered.
So what does the increasing prevalence of EVs actually mean for you? Well, it depends.
There are three main factors to consider:
There’s a push and pull between adoption and policy, because policy impacts adoption. And then adoption may force the issue on policy.
For example, California makes up about a large percentage of all electric cars that have been sold in the US since 2011. And policy is one of the factors influencing California's relatively high adoption rate. For instance, California has 100 government incentives related to EV purchases. These benefits include grants, tax breaks, loans and leases, rebates, credits, exemptions and other programs. As adoption grows, this policy may change.
Takeaway: When you're thinking about EVs and your company, first take stock of your company's vehicle program and your state-specific adoption rate and policies.
For those considering electric vehicles, affordability is often the number one concern.
Today, EVs are more expensive than their gas counterparts.
However, there are some models already on the market with a <$40K base price. And market-wide trends show that prices should naturally come down as more and more EVs become available.
As part of an August announcement from the White House on steps to drive American Leadership Forward on Clean Cars and Trucks, major manufacturers committed to having EVs account for 40-50% of their US sales by 2030. Both Ford and GM are releasing electric versions of their most popular models, including the F-150, the best selling truck in America for the last 44 years.
Another factor to remember is incentives, which can play a big part in increasing affordability. While California has the most at 100, there are almost 700 state incentives in total.
And there are an additional 50 federal incentives for purchasing electric vehicles. For example, there's a federal tax credit of up to $7,500 for the purchase of a new electric or plug-in hybrid vehicle (on up to the first 200,000 sold of a model).
In addition to incentives, there are several other trends—from state policies to lowering battery costs—that further indicate a future decline in EV prices.
Once an employee has an EV, what does the IRS say about reimbursing for business use?
The short answer is: nothing. When it comes to employee mileage reimbursements, the IRS does not differentiate by vehicle type. The current IRS standard mileage rate applies whether you’re driving an electric vehicle or gas-powered car.
But it's important to keep your eye on the IRS because this stance is likely to evolve as adoption grows. Looking at other countries, the UK and New Zealand are two that have mandated a different reimbursement rate for EVs.
Just because the IRS doesn't have a separate policy for EVs yet, doesn't mean electric and gas-powered vehicles should be treated the same though.
When determining how much you should reimburse an employee for business use of their personal vehicle, it's important to consider the fixed and variable costs, which change depending on the automobile. We use this approach to set rates when designing a Fixed And Variable Rate (FAVR) reimbursement program for our customers.
Fixed costs cover ownership costs like depreciation and insurance.
These costs for an EV are typically higher than for a gas-powered equivalent of the same model and in the same location. The main reason is the actual vehicle price is higher. But as vehicle prices go down, so should these costs.
Take depreciation. The rate at which electric cars depreciate is on par or slightly higher than traditional cars, but the dollar amount of depreciation is higher because the rate is multiplied by a larger purchase cost. Of course, class, features, and the reputation of the vehicle’s manufacturer all have an impact on depreciation, just like with any car.
Insurance premiums are also higher and should normalize with adoption.
”Because EVs are new and represent a small fraction of the marketplace, there simply isn’t enough data yet to paint a clear picture of the insurance risk...This can lead to seemingly wild swings in premium costs because insurance companies are trying to find the sweet spot between covering their risk and offering attractive insurance quotes.”
- AAA
Finally, registration and license fees are often higher for EVs because state governments are trying to make up for lost revenue from gas taxes. EV owners don’t have to fill up on gas, so they aren't paying gas tax. However, they are still operating and using the roads, whose maintenance is traditionally funded by gas taxes. Currently, the average license + registration for EVs is $155.
Now, let’s look at the variable costs to operate a vehicle, which depend heavily on how many miles you drive. These costs include fuel, tires, maintenance and repairs. For most of these items, the cost for an EV is lower than gas-powered vehicles.
When people speak to savings from owning an EV, this is where it comes from. Electricity rates and per mile fuel costs for EVs are much lower, not to mention more stable.
With maintenance, there’s simply less required.
“With an EV, you don’t have as many parts to replace on a regular basis, because there just aren’t as many moving parts as in a gasoline-powered car. The oil changes and engine tuneups we all know from gas cars are rendered obsolete by the EV’s relative simplicity.”
- Consumer Reports
To bring it back to the beginning, what does the increasing prevalence of electric vehicles mean for mileage reimbursement?
Everything points toward increasing adoption, spurred especially by car manufacturers, which will also lead to declining purchase prices and related costs.
Today, we estimate that an employee driving 20,000 miles a year is paying 56 cents per mile to own and operate their electric vehicle. Reimbursing them at the IRS standard rate would be fair.
But as costs go down, that rate may not make so much sense anymore. Nor may a single cents per mile rate be the best option for determining reimbursement amounts.
As you’re likely to have more and more employees purchasing an EV, it’ll become an increasing priority to figure out how to reimburse them appropriately. Now you have the key facts to get started with evaluating what electric vehicles mean for your business and vehicle program.
We help people save time and money. At Everlance, we're on a mission to empower mobile workers and businesses. That sometimes leads us to generalize tax information. Everlance team members are not certified tax professionals. If you need help with your specific tax situation, please reach out to your tax advisor.
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