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The Hidden Cost of Personal Use

September 22, 2009, by Mike Antich - Also by this author

By Mike Antich

Allowing personal use of company-provided vehicles is a common industry practice - about 87 percent of commercial fleets allow it. Personal use occurs when an employee uses a company vehicle for private transportation not associated with authorized company business. A company's cost for personal use depends on the method used for charging the employee. If the value of personal use is imputed as income, the employer does not recover any of the personal use cost. If the employer and employee share the cost of personal use under a payment program, as is done with 81 percent of fleets, a company can offset some of the cost of the program. However, many companies are wondering whether they are charging enough for personal use. At some companies, this discussion is long overdue. When re-evaluating personal use charges, a common mistake is to ignore the "hidden" costs of personal use.

Impact on Vehicle Depreciation

Personal use has an adverse impact on the resale value of fleet vehicles. There is a direct cost relationship between the number of personal miles allowed and the vehicle's ultimate resale value. Personal use accounts for approximately 15-18 percent of the overall miles accumulated during a vehicle's service life. Each personal mile driven not only reduces a vehicle's residual value, but also shortens its service life by causing it to reach its optimal mileage replacement earlier. For instance, a commercial fleet intermediate sedan averages 24,840 miles per year. At an average personal use rate of 16 percent, a typical fleet sedan will add an additional 4,000 miles per year as a result of personal use. Commercial fleets, on average, keep intermediate sedans in service for 29 months. If a typical fleet vehicle averages almost 4,000 personal miles per year, that means almost five months of a vehicle's 29-month service life have been consumed by personal use. Likewise, if 16 percent of a fleet vehicle's mileage is related to personal use, the life of maintenance "wear" items, such as tires and brakes, has correspondingly been shortened a like amount and need to be replaced, at company expense, earlier than normal.

Indirect Cost of Program Administration

There is an administrative cost to provide personal use as an employee benefit. Administering a personal use program is expensive, with internal costs ranging from $40-$80 per year per vehicle, depending on how a company manages the process.

The IRS requires every business to measure and report as income the extent of an employee's compensation associated with the personal use of a company-provided vehicle, including the value of company-paid fuel. The process of calculating personal use taxable benefits is an end-of-the-year administrative headache. Personal use increases the company's overhead by requiring significant program administration. For instance, companies must monitor driver submission of personal use reports. For drivers who fail to submit a report, monthly notices must be sent as a reminder. Similarly, driver statements of personal use mileage must be periodically audited to ensure compliance and that drivers are keeping accurate business records of miles driven. Many drivers are very meticulous about reporting personal use. However, the 80/20 rule applies to personal use administration. Every fleet manager has stories of drivers who simply can't, or won't, report personal use mileage on a regular or timely basis, despite numerous attempts (and threats) to get them to comply. Chasing after these "scofflaws" is extremely time-consuming and aggravating, diverting company personnel from their other responsibilities. Anyone who administers a personal use taxable benefit program will tell you it requires significant administration. This is an indirect cost often not factored into personal use chargeback calculations.

Know Your Costs

As fleet manager, you need to know what it costs your company to provide personal use - not just the employee taxable benefit, but also the total cost to the company. It is important to consider not only all direct, but also indirect costs to offer this benefit. This includes the cost of fuel, maintenance, increased wear-and-tear, and program administration, along with insurance and risk exposure. A fleet manager must quantify the cost of each of these variables and calculate the total cents-per-mile cost by each vehicle type in the fleet. Once you have accomplished this, an accurate estimate for the cost of personal use can be determined by multiplying this cents-per-mile cost by the average personal miles driven by employees.

Let me know what you think.



  1. 1. Joel Jalovec [ September 24, 2009 @ 10:48AM ]

    I enjoyed this article very much. I used to work for two insurance companies as an adjuster and had company vehicles at each. One company charged us $50/month and the other did not charge anything. I always used to think the $50 company was being cheap and just trying to make some money from the adjusters but after reading your article, I now see the need for a company to do this.

  2. 2. Steve Kibler [ September 25, 2009 @ 01:42PM ]

    Great points on a contriversal subject. I would wager that few companies/agencies has a system which recovers the appropriate costs for personal use; I know we don't. As with most fleet managers it's nearly impossible to apply any quantifable costs. Mike does a good job estimating the costs on a vehicle with high utilization but this becomes a hard-to-quantify variable with low utilized vehicles. We all pay for what is a cultural curse in today's workforce - entitlement.

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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