Typically large corporations do this, but any corp can, depending on quarterly tax filings. The short answer is that companies want to be paid now (for truer tax liability and to have cash in hand), but want to pay their debts as long out as they can (to preserve cash reserves). Any way my corp can lengthen the payment term back to reimburse me for my travel, the more benefit to them. A large corporation can earmark my estimated travel expense to a simple interest bank account and wait for the actual travel expense to clear, and then pay me from that bank account. With small companies, it probably isn’t worth the peanuts in interest, but with large corporations with large deposits, and many travel expenses, it may be worth their while. Once you factor in offshore affiliates and tax havens, the savings against tax start to really mount up.
I think this might be it. People with small, reliable low-gas-mileage cars with cheap maintenance costs are getting a great deal at $0.53/mile, while people driving gas-guzzling Escalades with $500 tires are losing money at that reimbursement rate. Overall it balances out as far as the IRS is concerned, but there are winners and losers.
I think there are other reasons companies prefer to rent, though. For one thing, if you’re picking up any customers or clients, the car is guaranteed to be pretty clean, while personally owned vehicles may be gross inside, or old and rusty outside, or both. Any sort of hiccup with a personal car can cost a lot of money in delays, and I think there’s a perception that rental cars are better maintained than POVs and less likely to blow a tire, need a jump or fail to start for some other reason.
Liability, not cost, is the real reason. I work in schools, and I’m not allowed to use my own vehicle to transport students, because the school’s insurance will not pay if someone gets in an accident using their own car. And there’s a good chance our personal car insurance won’t cover an accident if our car was being used forwork purposes, leaving the school district holding the bag.
I work for the state of California.
Using a personal vehicle for work-related travel is reimbursed by the state at 54.5c per mile, but they also have limits about how much personal mileage they’re willing to reimburse.
Last week, i had to travel to Long Beach from San Diego for work, a distance of 110 miles each way, or about 220 miles total. At 54.5c per miles, that would have been a reimbursement of about $120. But the official paperwork for this meeting said the following about travel by car:
So i rented a car. Here in Southern California, car rental is ludicrously cheap. I rented a full-sized car (Chevy Impala) on my own, with no special corporate discount, and the full price for two days, including tax, was $62.92. Gas, which they will reimburse on top of the rental, was about $24.
Before we do any reimbursable, work-related driving, we have to take a defensive driving theory course (either in person or online), and we also have to certify that we have our personal vehicles insured at a level acceptable to the state.
Excellent points. They might just say “it’s cheaper” so as not to have to make this awkward case to their employees. Although mhendo’s tale does make it sound like a bargain to rent. One wonders why the prices are so low.
The car rental companies obviously know what works to make a profit because they have a ton of data they can use to predict how long it takes a certain type of car to be profitable. They can see that to make a profit on, say an intermediate class car, they need to rent it at an average of $X/day and resell it for $Y after Z miles. They also have a range of customer types, so on one end of the spectrum they have a less profitable customer that rents the cheapest car for a day and racks up a ton of miles, but then on the other end there is a customer that rents an expensive SUV for a week and only use it to commute a few miles a day while their normal car is in the shop.
I’m having a hard time understanding the assumption that the factors that go into a corporate/government mileage reimbursement rate are exactly those that go into the $/mile that a car rental company determines they need to make to turn a profit.
I don’t believe I’ve ever rented a normal car in the US that had a mileage limit. U-Haul does have them, but that’s a very different business. Maybe there’s some “reasonableness” limit somewhere? I wonder what would happen if you went and rented a car somewhere with unlimited mileage, put it up on blocks, and just spun the wheels as fast as you could for a week, returning it with 20,000 more miles on it.
The thing about adding mileage limit is that it doesn’t just recoup costs from customers who drive a long way, it also changes customer behavior (some customers will pick whichever is cheaper on the face, but be upset by excess mileage charges. Some customers will carefully calculate and choose the rental with the lower total cost, some customers will choose the company without the limit because it’s simpler, some customers will do some weird fourth thing that doesn’t make any sense, but they wouldn’t do it with unlimited mileage for some reason…). And that change in customer behavior might just cost you more than the more efficient pricing model gains you.
I think the problem with this question – how it’s “cheaper” for a company to rent a car than to pay mileage – is that it starts with the bad premise that the mileage reimbursement rate a company pays to employees is somehow linked to the business costs of a car rental company. As I understand it, most companies reimburse employees by using the standard mileage rate set by the IRS because it is the rate at which companies may claim for a business deduction. While the IRS presumably uses some metric related to actual vehicle operating costs to determine the standard mileage rate, this really doesn’t have a direct correlation to the business costs of car rental company. As mentioned by several posters, several variables (ownership and subsidy by a car manufacturer, corporate discounts, etc) means that the rental rate a car rental company has to set to be profitable is different from what the IRS’s calculation of a reasonable standard mileage rate.
They don’t have to be “linked”. It’s just an oddity in economic terms for it to be cheaper to have someone rent a different car than to compensate them for the use of their own. Other things people rent short term don’t work that way. I can for instance get an apartment that is much larger than a hotel room, for much less of a daily cost. Or maybe even closer to the idea of renting a car: have you ever rented a bike from a bike shop? I have, and the ratio of the cost of doing so for a few days to the cost of *buying *a bike was, I thought, way too high.
When I lived in Southern California I used to rent cars when taking trips to the bay area to visit friends because it was so cheap and I didn’t want to put wear and tear on my car. I think the cheapest rate I ever got was $17 per day, not including taxes and fees!
I hear you about the oddity (see my post above about my experience with cheap car rentals in CA). My point was that you can’t really assume that the standard mileage rate a company uses to reimburse an employee has any meaningful correlation to the expenses seen by a car rental company. Unlike private individuals, car rental companies pay fleet prices for cars, so they pay a much lower price for each car than you and I would. They also likely get discounts on gasoline given their volume, which is something you and I don’t. They also have lower car maintenance costs because they either do it in-house or contract it out. All these factors mean that it costs less for car rental company to keep a car on the road than it does a private car owner.
It may be cheaper for them to keep a car on the road, but a private owner doesn’t have a rental counter, a permanent parking space at the airport, advertising expenses, employees, etc.
It’s also true that the IRS raised the reimbursement rate back when gas was $4gallon. AFAIK it hasn’t come back down with the gas prices.
Also this. I haven’t ever seen a big company whose travel office was properly staffed. They are always cutting back and forcing the most ridiculous generalizations as a result. There’s just no other way.
And liability does come into it. On a longer trip, the corporate umbrella policy may prefer that employees be in a perfectly maintained vehicle. Or at least in a vehicle that - should it break down and the employee be harmed - another company has liability for any negligence on. If the employee’s car breaks down while they are on company travel, and the employee is harmed, the company will be liable for workman’s comp and other damages. If it’s a maintenance problem on a rental car, the corporate insurance could subrogate the costs back to the rental car company’s policy.
I wouldn’t be surprised if keeping that a requirement across the board makes the corporate insurance policy cheaper.
The major difference is that the cost of the rental is set by the market and varies by the vehicle and location, and the cost of compensation is set by the government, and is a single rate.
Even if you assume that the IRS is 100% accurate about the average cost of operation of a vehicle, there should still be plenty of cases where the rental is cheaper (even after expenses and profit).
This is a good point, and IME there are subtle problems if one isn’t paying attention. According to my policy and agent, driving myself on a business trip is the same as going to work (just further). My coverage isn’t affected since I’m not using the truck as company transport. However, it gets murky if they request that I load up a bunch of lab equipment since I’m “going there anyway”. I decline carrying anything but myself and my laptop because I’m not sure how the insurance company would react if my truck had a lot of Mega-Corp’s equipment aboard in a crash.
Another interesting point, obviously liability related. I’m a pilot and once mentioned that I might fly my own airplane for convenience on one trip. This was met with a harsh warning that not only would the company refuse reimbursement, I would be terminated immediately if discovered aviating myself on company business.
I used to travel a lot for my job and whenever humanly possible drove my own car.
I made a fortune. It would have been cheaper for my employer to rent me a car, for sure (or simply enforce a rule that I had to rent for trips over X miles.) Hell, they could have literally bought me a car and saved money.
My company has a rule that I have to have x amount of liability insurance if I use my car on company business (300,000 or more, I think). It protects them in case I do something stupid and my victim tries to sue my employer.
If I’m in a rental car, that might protect the company - whereas, if I drive my own, the company doesn’t know for sure that I’ve followed the policy.
For a 200 mile trip (400 round trip): you’re looking at the IRS rate of 50 cents or so per mile, or 200 dollars, in mileage reimbursement. A rental car for, say, 2 days, will be less than 200 dollars.
So yeah, it’s cheaper for the company to rent a car for the employee (though if she truly has to drive 30 miles to / from the rental place, is she being compensated for that?).
For longer-term use, companies might well lease a car. My father was a sales representative and had company provided cars his last 10 years or so. Arguably less paperwork on both sides, though I gather he had to reimburse the company for personal use of the car.