Vehicle Procurement

Question 1

Questions

Answer 1

Answers

Question 2

5.1.1 What are two different types of plans for employee reimbursement? (p.65)

Answer 2

1. Monthly Allowance
2. Accountable Plan

Question 3

5.1.2 Why is an Accountable reimbursement plan beneficial to both the employer and employee? (p.65)

Answer 3

Since reimbursements paid under Accountable Plans are excluded from gross income and are not reported on an employee’s W-2, they are usually the most desirable type of program from both the company’s and driver’s standpoints.

Question 4

5.1.3 What three rules must be followed in order to have an accountable reimbursement plan? (p.65-66)

Answer 4

1. The expenses must have a business connection.
2. The driver must provide adequate accounting for their expenses within a reasonable period of time (generally, within 120 days
3. “Excess Payments” must be returned.

Question 5

5.1.4 List three examples of accountable plans. (p.66)

Answer 5

• Flat rate
-Company pays a driver $800 to cover their vehicle expenses
-Driver has $600 in substantiated business expense and returns the excess $200
• Cents per mile
-Company pays driver at or under the current IRS Optional Standard Mileage Rate
• Qualifying Fixed and Variable Rate (FAVR) Plans

Question 6

5.1.5 What are non-accountable reimbursement plans? Give an example. (p.66)

Answer 6

1. These are plans that don’t meet one or more of the criteria required to be a tax-free reimbursement
2. Most common being “flat rate” vehicle reimbursement programs.
   Example of Non-Accountable Plan:
   • Flat rate
   • Company pays a driver $800 to cover their vehicle expenses
   • Driver does not substantiate their expense or return any excess fund

Question 7

5.1.6 What are the pros and cons of a cents-per-mile reimbursement program? (p.67)

Answer 7

Pros
• Easy to administer
• Tax-free (if under the IRS Optional Standard Mileage Rate)
• Is a government approved rate
Cons
• Is not geographically sensitive
• Does not properly account for mileage (depreciation)
• Under-pays low mileage drivers
• Over-pays high mileage drivers
• Provides an incentive to report miles
• Lags the marketplace by a year
• Not intended as an accurate reimbursement for business use of a personal vehicle

Question 8

5.1.7 What is the IRS rate and why do many organizations use it? (p.67)

Answer 8

IRS’s Optional Standard Mileage Rate for Business (IRS rate) which is updated each year with a new Revenue Procedure number
It is easy to administer and explain, and takes some of the “randomness” out of the reimbursement program.

Question 9

5.2.1 Under which circumstances is it preferable to have employees provide their own vehicles? (p.68-69)

Answer 9

• Temporary or intermittent requirements
• Low-mileage drivers
• Lack of infrastructure to support an employer provided pool
• Strong employee preference

Question 10

5.2.2 In what situations should employee provided vehicles not be considered? (p.69)

Answer 10

• The type of vehicle required is other than those normally owned by employees. For example, the requirement for off-road travel or trans-
portation of heavy or oversized loads would usually preclude the use of employee provided vehicles.
• Seeing employees taking the vehicles they use for business home at night would negatively impact public perception and the image of the
organization.

Question 11

5.2.3 How can temporary or intermittent vehicle requirements be met? (p.69)

Answer 11

Rental - Loan from POOL - Driver reimbursement

Question 12

5.2.4 Under what circumstances can employee reimbursement be preferred even when employer provided vehicles are less expensive? (p.69-70)

Answer 12

a. The organization has limited funds available for purchase and does not want to lease vehicles.
b. Public perception may prevent an organization from allowing employees to commute with their employer provided vehicles.
c. Parking space or overnight security restrictions may prevent overnight and partial day storage of the employer’s vehicles. In this case, the employer may opt to eliminate its fleet vehicles and reimburse employees for the business use of theirs.
d. d. Strong employee preference

Question 13

5.2.6 When might a Fleet Manager consider renting a vehicle? (p.71)

Answer 13

In some cases your fleet may not have the number of vehicles or the right vehicles required to fulfill certain tasks.

Question 14

5.3.1 What are some of the requirements of vehicle purchasing? (p.72)

Answer 14

Requires a considerable capital outlay
- Ffocus on a variety of administrative tasks: initial licensing and renewals, personal property tax payments, title retention and remarketing of vehicles

Question 15

5.3.10 How can the Fleet Manager get funding from Federal Agencies? (p.74)

Answer 15

1. This type of funding is typically available for purchasing or modifying vehicles to mitigate environmental impact.
2. To find these grants, Fleet Managers should monitor the agency websites, network with State Clean Citie Coalitions, and listen to vendors. 3. Vendors can be a good source for where to obtain grant money

Question 16

5.3.11 How can the Fleet Manager secure funding from the state? (p.74)

Answer 16

1. Clean air vehicle grant funding is more prevalent at the state level
2. National Association of State Energy Officials (NASEO) releases a directory of State Energy Offices (SEOs) for clarity

Question 17

5.3.12 How can liens affect Fleet Managers who finance their vehicles? (p.74)

Answer 17

The vehicle may not be sold until The lender is paid off and The lien released

Question 18

5.3.13 What are some administrative issues that arise from unpaid tickets? (p.74)

Answer 18

Liens - Registration Blocking - Registration Suspension

Question 19

5.3.2 What are some advantages of vehicle ownership? (p.72)

Answer 19

1. Tax relief on depreciation
2. Pricing leverage with dealers
3. Maximization of resale proceeds.
4. Retaining the salvage value is one of the key advantages of ownership.

Question 20

5.3.3 When might it be preferable to order vehicles from the dealers stock? (p.72)

Answer 20

1. Dealerships want to sell their vehicles to customers by making them attractive with add-ons such as heated seats, satellite radios, and unneeded warranty and package options.

Question 21

5.3.4 What are some advantages and disadvantages to purchasing from dealer stock? (p.72)

Answer 21

Dis: ordering from the dealer can actually be more expensive due to dealer markup
Ad: When it comes down to timing issues however stock will be the best bet

Question 22

5.3.5 What capital considerations should the Fleet Manager make? (p.72)

Answer 22

1. Money is a finite resource and may be better invested in other assets such as hiring staff, advertising, or paying down debt

Question 23

5.3.6 How does Return on Investment affect the purchase decision for both public and private fleets? (p.73)

Answer 23

If the profit margin is greater than the cost of capital then it makes more sense to use internal funds to generate additional revenue and borrow the money for vehicles

Question 24

5.3.7 What is the true cost of capital? (p.73)

Answer 24

dependent on how the organization finances its assets (vehicles).
Finance through retained earnings or does the organization finance the fleet through debt
RE: internal capital, investments, rate of return, history, credit worthiness, bond rating, etc.
* The organizations true cost of capital is based on the weighted average of these costs.

Question 25

5.3.8 What are the Sales tax implications of both purchasing and leasing vehicles? (p.73)

Answer 25

When leasing most states charge sales tax on the monthly lease payment.

Question 26

5.3.9 What are some of the more common funding sources? (p.73-74)

Answer 26

Internal Funds - Borrowing - Leasing - Govt funding / Grants

Question 27

5.4.1 Define the term Lease. (p.74)

Answer 27

A rental that, by contract, is clearly defined as to length, cost and stipulations.

Question 28

5.4.10 What is a Terminal Rental Adjustment Clause (TRAC)? (p.77)

Answer 28

Most open-end leases also contain what is known as a TRAC clause that ties the lessee to whatever difference may exist between the book and selling values of the unit upon remarketing.

Question 29

5.4.11 How can the Fleet Manager determine the mileage criterion to be used in the leasing agreement? (p.78)

Answer 29

If there is not a vehicle on which to base an accurate comparison then discuss with the user and his/her management to try and be as accurate as
possible

Question 30

5.4.12 What are the differences between a floating and fixed financing rate? (p.78)

Answer 30

With floating rate financing, base rates are set each billing cycle, based on the prevailing rates at the time. As interest rates fluctuate, so do monthly lease payments.

Question 31

5.4.13 What is the difference between on and off the balance sheet accounting? (p.79)

Answer 31

The main difference between on or off balance sheet accounting is how assets are treated
1. Are they considered an asset and financially depreciated, or are they considered an operating expense
2. With on balance sheet accounting the organization is depreciating the asset and the asset holds a residual value (it could be sold to raise capital).
3. With off balance sheet accounting, the asset is recorded as an operating expense and has the potential for an improved return-on-investment due to fewer owned assets.

Question 32

5.4.14 List some of the Leasing fees that the Fleet Manager should be aware of. (p.79)

Answer 32

• 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
- Variable Interest: interest rates based on conditions that may have nothing to do with leasing (for example, lease rates may spike if you cancel use of a maintenance program

Question 33

5.4.2 What is the difference in cost between leasing and purchasing vehicles? (p.75)

Answer 33

purchasing is typically less expensive in the long-term than leasing

Question 34

5.4.3 What are the four questions to ask in order to classify a lease? (p.75)

Answer 34

• Does the ownership (title) 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 fair market value of the asset?

Question 35

5.4.4 What is an operating lease? List some of the benefits it provides. (p.75

Answer 35

Want to use and return at end of lease

Question 36

5.4.5 Who bears the risk in open-end and closed-end operating leases? (p.76)

Answer 36

Open End: Lessee
Closed End: Lessor

Question 37

5.4.6 What is a Capital lease? (p.76)

Answer 37

classified and accounted for by the lessee as a purchase and by the lessor as a sale or financing transaction
may also be known as a finance lease or direct lease

Question 38

5.4.7 Define the two types of Capital leases. (p.76)

Answer 38

Finance Lease – Finance leases are full-payout, non-cancellable agreements in which the lessee is responsible for vehicle maintenance, taxes and insurance.
Direct Financing Lease (Direct Lease) – direct lease is a financial arrangement and contract through which the lessor (a financial institu-
tion, a leasing company or similar entity other than a manufacturer or agrees to furnish, and the lessee agrees to hold assets for a set period of time, at an agreed upon price, and in accordance with specified terms and condition