Employers are entitled to tax deductions for mileage reimbursements to employees. However, the types of records maintained affect tax reporting by the employer as well as the tax impact on the employee.
A registered tax agent, such as an IRS enrolled agent may be called upon to represent either employers or employees relating to mileage reimbursement matters. Reinforcing knowledge about such subjects is the purpose of meeting the annual enrolled agent education requirement.
Mileage reimbursements by an employer must cover only vehicles used by an employee while conducting business services for the employer. Employees are required to provide adequate documentation related to reimbursed business mileage. The employer must receive a record that states the date, place, and business nature of vehicle use. A single record may document several purposes on an uninterrupted round trip. Minimal personal use between business locations is considered uninterrupted use.
In some cases, employers provide employees with advances to cover business mileage. Employees are required to return advances that are not later substantiated by mileage records. The IRS establishes a standard mileage rate for business miles at least annually. Employees must return reimbursements that exceed the IRS standard mileage rate.
Employees must provide the mileage record to employers within a reasonable time. The IRS considers a reasonable time as 60 days after the miles were driven. However, only 30 days are considered reasonable for providing records after an employer advance for vehicle business use.
When the IRS standards for a mileage reimbursement are followed, employees do not include the payments as taxable income. The employer then deducts the reimbursements to the employee as a mileage expense. However, if the accountability rules are not followed, an employer must report mileage reimbursements as compensation on an employee W-2.
Among the topics covered in enrolled agent continuing education requirements are assisting businesses to establish reimbursement plans that meet IRS conditions. EA hours may also address resolving IRS problems related to employees who don’t provide adequate records of business mileage.
Another subject in tax CPE is potential tax deductions for employees with business mileage. An employee reimbursed at less than the standard mileage rate may deduct the portion of mileage expense that is not reimbursed. This tax deduction is only available for an employee who itemizes deductions. Employees are also entitled to deduct parking fees and tolls related to business use of their vehicles-if their employers do not reimburse these expenses.
In addition, an employee who has had mileage reimbursement added to compensation may deduct mileage expense. However, the employee must have mileage records that meet IRS standards despite not providing them to the employer for reimbursement.
