Vehicle Acquisition Financing and Reimbursement Programs

Question 1

Describe some of the administrative tasks involved in purchasing a vehicle.

Answer 1

Policy setting
supplier management
fleet user advocacy
customer relationship management

Question 2

Describe the debt purchasing method.

Answer 2

Companies use debt as a part of their financial strategy. Companies may use any one or a combination of debt types to finance.

Question 3

List some of the other considerations involved in purchasing with debt.

Answer 3

Equity securities don’t ensure payment to investors by issuer.
Bond prices are determined by the market.
Stock prices are set by the market based on expected future earnings.
Bond investors are certain of their expected cash flow.
Equity investors are not assured of future income.

Question 4

What are secured and unsecured debts?

Answer 4

Secured – creditors have recourse to the assets of the company.
Unsecured – creditors don’t have recourse to the assets of the borrower.

Question 5

What is the difference between a private and public debt?

Answer 5

Private debts are bank loan type obligations.
Public debt is freely tradable on a public exchange.

Question 6

What is a term loan?

Answer 6

The simplest form of debt. Consists of an agreement to lend a fixed amount of money for a fixed amount of time.

Question 7

What is a syndicated loan?

Answer 7

A loan that is granted to companies to borrow more money than any single lender is prepared to risk.

Question 8

What are bonds, and how are they used?

Answer 8

Bonds are debt securities and are one of the three main asset classes. Issued to investors when they want to borrow money to finance projects for a defined period of time at a fixed interest rate.

Question 9

What are stocks?

Answer 9

Stocks are equity with ownership interest and no contractual obligation. Expectation for stocks to increase in value when the issuing company’s growth in revenue and profits.

Question 10

What is mezzanine financing?

Answer 10

A subordinated debt or preferred equity instrument. Can be structured as debt or preferred stock.

Question 11

Describe some other options to finance debt.

Answer 11

Securitization
Treasuries
Swaps
Certificate of Deposit
LIBOR
Prime
Commercial Paper

Question 12

Define the term lease.

Answer 12

A lease is a rental that is defined to length, cost and stipulations by a contract.

Question 13

What four questions should be asked in order to categorize leases?

Answer 13

Does the ownership transfer at the end of the lease?
Does the lease contain an option to purchase the asset at a bargain price?
Is the term of the lease at least 75% of the estimated economic life of the asset?
Is the present value of the future minimum lease payments at least 90% of the FMV of the asset?

Question 14

What is a capital lease?

Answer 14

Is classified and accounted for by the lessee as a purchase and by the lessor as a sales transaction.

Question 15

What is the difference between a finance lease and direct financing lease?

Answer 15

Finance lease – full payout, non-cancellable agreements where the Lessee is responsible for maintenance, taxes and insurance.
Direct financing lease – a non-leveraged lease that meets any of the criteria of a capital lease plus additional criteria.

Question 16

What is an operating lease?

Answer 16

organizations that want to update/replace their equipment
want equipment usage without ownership
want to return equipment at end of the lease.

Question 17

What are the advantages to using an operating lease?

Answer 17

Good for bypassing capital budgeting. Under an operating lease, the leased asset is not considered an asset of the lessee; the lessee records the asset as an operating expense.

Question 18

Describe several types of operating leases.

Answer 18

Close-end lease, Open-end lease, Terminal Rental Adjustment Clause (TRAC).

Question 19

Describe lease term.

Answer 19

The contractual term plus renewals where the lessee has an economic incentive to exercise the options.

Question 20

What consists of an estimated lease payment?

Answer 20

Interim rents
contractual rents
renewal and purchase options
termination penalties.

Question 21

What are residual guarantees?

Answer 21

an estimated payment with review and adjustment at each reporting date.

Question 22

What are short term leases?

Answer 22

A lease with a maximum possible lease term of 12 months or less, including any options to renew or extend.

Question 23

What are four methods to identify lease types for lessors?

Answer 23

Receivable & Residual (R&R)
Short-term leases
Investment properties
Multi-lessee.

Question 24

What is floating rate financing?

Answer 24

Base rates are set each billing cycle, based on the prevailing rates at the time.

Question 25

Describe fixed rate financing.

Answer 25

Set the interest rate at the time of lease inception and do not vary it throughout the lease term.

Question 26

Describe the major lease fees to be aware of.

Answer 26

Administrative fee
interest markup
issuance fees
interest rounding
interim interest
interim rent – front end of lease
interim rent – back end of lease
fully depreciated lease admin fee

Question 27

What two types do leases fall under from a tax accounting perspective?

Answer 27

True tax lease, Non tax lease.

Question 28

What must be true for a lease to be a non-tax lease?

Answer 28

• lease payment is applied to an equity position in the asset
• the lessee will acquire the equipment title with specified number of rental payments
• the agreed payments exceed the current fair rental value
• lessee has a purchase option
• any portion of the lease payments are designated as interest.

Question 29

What should the Fleet Manager consider when making the decision to rent or not?

Answer 29

Type of vehicle required
Time required
Cost

Question 30

What is the largest benefit of renting over leasing or purchasing?

Answer 30

There is no long term obligation. Beneficial during economic downturn.

Question 31

What are the basic guidelines for vehicle rental?

Answer 31

• Replace vehicles that are being repaired or under maintenance
• Meet requirements during peak periods
• Meet infrequent specialty requirements
• A business case demos renting is the best option.

Question 32

List some alternatives to providing an employee with a permanent vehicle.

Answer 32

Rent vehicles, Operate a pool program, Offer nothing, Reimburse employees business mileage on personal vehicles.

Question 33

What should a fleet policy contain when considering a mix of reimbursement and employee provided vehicles?

Answer 33

Low mileage drivers, High employee turnover, Temporary drivers/short term assignments, New hires.

Question 34

What are the three types of reimbursement programs?

Answer 34

Mileage reimbursement, Fixed allowance, Fixed and Variable reimbursement (FAVR).

Question 35

Why have some companies switched from flat allowances to accountable plan allowance programs?

Answer 35

Flat allowances may treat employees inequitably if there are varying travel and expense patterns.

Question 36

What is the dual reimbursement rate?

Answer 36

Employees qualify for a higher mileage rate if no company vehicles are available. They would take a reduced rate if they declined available company vehicles.

Question 37

What criteria must a vehicle mileage reimbursement plan meet in order to be deemed non-taxable?

Answer 37

Business connection, Substantiation, Employer reimbursement.

Question 38

What are the two tax free programs in the US?

Answer 38

Flat rate per mile, Accountable allowance plan.

Question 39

What is the IRS standard mileage rate?

Answer 39

Mileage rate dictated by the IRS and is easy, tax exempt and defensible.

Question 40

What criteria must an allowance plan meet in order for it to be non-taxable to the employee?

Answer 40

Reasonably calculated, Provided on a uniform and objective basis, Periodically paid at a rate that combines a fixed and variable rate, In accordance with reasonable business practices.

Question 41

What is a fixed and variable rate allowance plan?

Answer 41

An accountable plan for calculating and documenting vehicle allowances and reimbursements using an IRS template.

Question 42

What are the guidelines provided by the IRS in order to help develop a FAVR compliance plan?

Answer 42

Data, Insurance, Vehicle age, Vehicle value, Minimum mileage, Business use percentage, Enrollment, Management employee enrollment.

Question 43

Compare a FAVR compliant plan with a non-FAVR accountable plan.

Answer 43

See table.

Question 44

What administrative tasks must be completed for both FAVR and non-FAVR plans?

Answer 44

Identify qualifying drivers, Determine vehicle standards, Collect driver information, Verify driver provided info.

Question 45

Why is reimbursement often more costly than other transportation options?

Answer 45

Operating a fleet is cheaper cents per mile than the IRS rate.

Question 46

What are some liability issues involved in reimbursing employees for personal vehicle use?

Answer 46

The legal concept of vicarious liability.

Question 47

What are the advantages and disadvantages of a reimbursement program to the employees?

Answer 47

Employee can choose their vehicle, Can allow them to afford a higher end vehicle, Reimbursement program may undercompensate employees.

Question 48

How might vehicle choice and reimbursement programs affect a company’s image?

Answer 48

Company has no control over vehicle selection.

Question 49

List the pros and cons of a vehicle reimbursement program.

Answer 49

Pros: good for short term temp employees, replaces needs for pool program, employee satisfaction, may be tax free, may reduce corporate risk during personal usage. Cons: cost based on retailer, vehicle may not fit business needs, less control.

Question 50

Define the term allowance.

Answer 50

An allowance is any payment that employees receive from an employer for using their own vehicle in connection with or in the course of their employment.

Question 51

What questions can be used to clarify if something is an allowance or taxable benefit in Canada?

Answer 51

What is and not an automobile? When does a benefit arise? How do you calculate the benefit for the employer provided vehicles? How do you calculate the allowance given to an employee for using their personal vehicle?

Question 52

What conditions must apply for an allowance to be deemed reasonable in Canada?

Answer 52

The allowance is based only on the number of business kilometers driven in a year, The rate per Km is reasonable, The employee has not otherwise been reimbursed for expenses related to same use of the vehicle.

Question 53

What is averaging allowances?

Answer 53

To comply with the rules on reasonable per-kilometer allowances, employees have to file expense claims with the employer on an ongoing basis.

Question 54

What are some of the expenses that an employee can claim on their income tax and benefit return?

Answer 54

CPP contributions, EI premiums, and income tax should be deducted.

Question 55

What is the requirement for employees to claim vehicle expenses?

Answer 55

An employee has not otherwise been reimbursed for expenses related to the same use of the vehicle.

Question 56

What is averaging allowances?

Answer 56

To comply with the rules on reasonable per-kilometer allowances, employees have to file expense claims with the employer on an ongoing basis, starting at the beginning of the year.

Question 57

What expenses can an employee claim on their income tax and benefit return?

Answer 57

CPP contributions, EI premiums, and income tax should be deducted.

Question 58

What are some strategies for employers who pay their employees automobile expenses?

Answer 58

• A flat per diem rate to offset the employee’s fixed expenses for each day the vehicle is required
• A reasonable per KM rate for each KM driven to offset the operating expense.

Question 59

What does a comprehensive fleet strategy require?

Answer 59

Optimizing use of all viable transportation alternatives, including permanently assigned vehicles, short-term rentals from motor pools, commercial rentals/mini-leases, POV reimbursements or allowances, and other forms of transportation (e.g., taxi, airline, mass transit).

Question 60

List some transportation options to consider.

Answer 60

• Motor pools – vehicles centrally located and shared by employees
• Car sharing services – ex. Zip car
• Public transportation – taxis, buses, trains
• Rental cars – can be effective alternative for a temporary basis
• Virtual meetings.