Mileage Reimbursement – What Are The Rules
You would be surprised to know that your employer is not required to reimburse you when you use your personal car for work-related travel. However, even if they are not legally obliged to, companies often reimburse employees to attract and retain talent and also because such mileage allowance are deductible as business expenses provided they respect certain IRS rules.
The standard mileage reimbursement rate
Each year the IRS updates the standard reimbursement mileage rate for business mileage. For 2016, it is 54 cents per mile, a 3.5-cent decrease from last year. To come up with this figure, the IRS conducts an annual study of both the fixed and the variable costs of operating an automobile. Companies that reimburse employees for business-related driving are tax-exempt up to this rate. In addition, employees can exclude the amount reimbursed from their gross pay for tax purposes.
The IRS requirements
To benefit from the mileage allowance relief, companies need to produce detailed mileage logs that contain dates, destinations, number of miles driven and the purpose of each business trip.
Sometimes a company may choose to reimburse employees based on a rate that is lower than the standard rate. In this case, employees can still deduct the unreimbursed portion. For instance, if the company pays 30 cents per mile instead of the IRS mileage rate of 54 cents, the employee can deduct 24 cents per mile on their tax return.
On the other hand, if the company reimburses mileage based on a rate that is higher than the standard rate or if the expense doesn’t meet the requirements, the IRS will consider the payment as a taxable compensation, basically a supplemental wage.
Because expenses related to driving can be significant, some companies prefer to prepay a mileage allowance. This is permitted as long as the employee returns any excess amount.
To calculate the total mileage allowance, just multiply the business miles logged during the year by the mileage rate. You should not forget to add the total parking fees and tolls for the year.
To qualify for a deduction as a business expense, the reimbursement must be paid exclusively for miles driven for business purposes. Examples of trips that qualify include driving to meet a client, audit a supplier or attend a conference. However, an employee cannot combine business and personal travel. If they stop to do a personal errand, all the mileage for the reminder of the trip will not be tax deductible. It’s also worth mentioning that commuting to and from home doesn’t qualify and therefore is not tax deductible.
Standard mileage rate or actual expenses
In addition to the standard method described above, business travelers can use the actual expense method (actual vehicle operating costs). Normally, people prefer the standard method because it is straightforward, no need to keep an extensive record of all car costs such as gas receipts, maintenance bills, records of insurance premiums and other allowable costs. However, the second method could yield a larger deduction.
To use the standard mileage rate for a car you own, you must choose the method the first year the car is available for business. In later years, you can choose to use the standard mileage rate or the actual expenses. If you lease the car, then you must use the standard mileage rate method for the entire lease period if you decide to go with the standard mileage rate.
To three main conditions to use the standard mileage rate are:
- You must own or lease the car,
- You must not operate five or more cars at the same time, as in a fleet operation,
- You must not have claimed a depreciation deduction for the car using any method other than straight-line.
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