After the successful cloning of dinosaurs through genetic engineering, you are ready to sell your company, International Genetic Technologies, Inc., and make a profit. Unfortunately, after looking at the financial books, buyers aren’t willing to pay what you had hoped. While you are disappointed to lower the selling price of your company, you agree to it and proceed with the transaction.
A few months later, your long-time friend sells her technology company for more than her desired asking price. You find out that she used a financial expert to get her accounting policies & practices in line in preparation for the sale. This included how they treat company versus personal car use. Your disappointment in your own sale turns to frustration as you realize you short changed yourself by not properly preparing your financial statements for the sale. Especially when it came to all of those dino-bone cargo trucks! You were improperly recording and reimbursing car expenses that drastically lowered your profitability in your books, costing you hundreds of thousands of dollars. OUCH.
Don’t wait until it’s too late to dig into your books to uncover buried profitability. Hire a financial archaeologist to remove the layers of debris and dust from the bones of your business, revealing the skeleton of a profitable company with proper policies and clean books. If a potential buyer can see the full view of your business – from tail to horns! – you’ll be able to sell your business for more. Improper vehicle use guidelines is just one of many areas that can layer a film of dirt over your business skeleton, hiding its true profitability. Call me today to dig deep and maximize your profitability upon sale.
Drawing the Line between Personal and Business Expenses
Many business owners struggle with clear guidelines on personal and business expenses, because a lot of times they overlap. For example, if you use a car for both business and personal expenses, who pays for it?
The best financial practice is to not mix personal expenses with business expenses, period. You want precise information on business expenses so that you have an accurate picture of your profitability to prepare for selling your company in 3-5 years. You might not be thinking about how much personal expenses are eating away at your profit, but you should. Telling a potential buyer that your annual profit is $3 million is much better than telling them it’s $2.8 million. You also might be more profitable than you think if you’re recording personal expenses on your business books…
You can learn more about how to treat personal expenses in your business by diving into my Business Budgeting Basics article.
Important Decisions For A “Company” Car
One area (out of many) that can help keep your books clean is properly expensing vehicle costs. As you’ll see below, these expenses can add up quickly and cause a dramatic decrease in your profitability.
Here is a list of decisions you need to make to keep your books clean and your profits accurate regarding business vehicle use and expenses. You may need to revisit these decisions as your company grows, as your service offerings and operating procedures will change.
Do you actually need a vehicle to service your business/customers? If you’re providing a service remotely, it’s likely obvious you don’t need a vehicle, and you probably aren’t reading this article anyway! If you use a vehicle sporadically to service your customers, a personal vehicle can be used…within parameters – keep reading!
Should employees use a company vehicle or personal vehicle? Early in the stages of a company, allowing employees to drive their personal vehicle is cheaper, as there is no start-up cost (purchasing a company car). If you allow your employees to use their own car, you should reimburse them for mileage used.
One additional question to ask yourself, however: do they have the right type of vehicle for the job? If they need to transport dinosaur fossils and archeological equipment back and forth from the dig site, a motorcycle isn’t going to work for the service job.
Do I want to reimburse employees for gas, or pay a mileage rate? The financial expert recommendation is to always pay a mileage rate. The reason is that it’s too easy to underpay (leaving your employees feeling cheated) or overpay (increasing your expenses unnecessarily). Consider this: if an employee drives a short 2 miles to a fossil dig site, they can submit a gas receipt that covers a full tank of gas, most of which was personal use. Or perhaps they drive a gas-guzzling Hummer when a fuel-efficient Prius would save your company a lot of money.
Unfortunately, vehicles don’t have two gas tanks to separate “business-use” gas from “personal-use” gas. Wouldn’t that be nice!
What mileage rate do you pay employees for driving personal cars? Our financial expert recommendation is to pay the IRS mileage rate to reimburse employees. This rate changes every year on January 1, so be sure to keep up-to-date. The IRS does all of the heavy lifting, so that you don’t have to do it. They study the total cost of vehicle ownership, including purchase, registration, insurance, gas, repairs and maintenance, and calculate a standard, national rate.
A couple of things to keep in mind: If you pay more than the IRS rate, you have to count the difference as compensation which has to be taxed just like wages. If you pay less than the standard rate, employees may feel cheated.
Do you want to charge mileage to customers? If so, what should you charge them? You can directly pass the cost of driving to and from a service visit to customers by charging a mileage fee, or you can incorporate the cost into the service total. Check out this article on uncovering your lost profits to learn how to properly price your services.
Common Profit-Burying Pitfalls
There are four areas that need your watchful eye as a business owner trying to maximize your profits before a sale when it comes to company and personal car use:
Watch out for commuter mileage from home to office. This is a personal expense that gets incredibly costly, even just for one employee. Our financial expert recommendation is to not allow employees to drive a company car to and from work. Alternatively you can have them reimburse the company this cost, using the standard IRS mileage rate.
- Your employee drives 20 miles to the office Monday-Friday and then drives back home 20 miles.
- 20 miles x 2/day = 40 miles/day x 5 days week = 200 miles/week.
- Multiply that mileage (200) by the $0.655/mile IRS rate in 2023 = $131/ week, or more than $500/month. That’s more than $6,000 a year!
This is a huge, recurring additional cost to your business that isn’t for the business! And if you are allowing this cost to be incurred by multiple employees, you may be expensing tens of thousands of dollars each year unnecessarily, which lowers your profit dramatically.
If you decide to allow your company to pay commuter mileage, be aware it is considered taxable compensation to the employee at the standard IRS mileage rate and should be included on their W-2.
Be mindful of employees driving a company car for personal reasons. Going out to get lunch during the workday, running errands between service calls, using the company truck to move apartments – these are all common ways employees take advantage of company vehicles. This adds additional wear and tear to the vehicle, and leaves you paying more for gas and maintenance than you need.
Legitimate reasons for employees to use a company car (or get mileage reimbursed) include: to service customers, to take a deposit to the bank, to pick up supplies for the office, to visit a potential customer for a sales call, to visit a prior customer to fix a complaint, to send employees to training, or to send employees to networking group events to drum up new business.
Confirm your insurance coverage on company vehicles is what it should be. If you are allowing employees to commute in a company car or drive company vehicles for personal reasons, whose insurance is responsible if there is an accident? The employee’s or the company’s? Or even worse, if you don’t realize the company car is being used for personal use and an accident happens, the business insurance company may decline to cover it. And your employee may not have good insurance to cover it. As the business owner, you should talk to your insurance provider about how they cover various situations and adjust your employee use policy accordingly.
Don’t be tempted by tax savings. It’s enticing to add personal expenses as business expenses, knowing that you’ll avoid taxes. This is tax evasion and a serious crime.
Many business owners choose to purchase a car and have it as a business vehicle but drive it for both personal and business. This practice is OK if the majority of driving is for business use. Track personal mileage to keep it separate, then remove the personal use portion out of the business expense and code it to the owner’s draw account. This will allow you to keep a clear profitability measure and stay on the right side of the tax law (be sure to check with your tax advisor on luxury and weight vehicle limits, though).
Hire A Financial Archaeologist To Uncover Your True Profitability
I am ready to serve as your financial archaeologist, digging deep to uncover your business’s true profitability. Set up a free 30-minute consultation today to see how you can maximize profits for healthy operation or a business sale.