The What and How of Business Mileage Reimbursements
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What is Mileage Reimbursements?
Mileage reimbursement is a mutually beneficial opportunity to receive tax reductions for both the employee and the employer.
Mileage reimbursements or the mileage allowance for employees vary a lot from company to company. There are no federal laws requiring companies to pay employees for driving their personal vehicles, but there are some US states that do have laws about this.
Establishing a clear policy for handling employee mileage reimbursements is an essential financial strategy. Employees should know what types of travel they can claim a mileage allowance for and how much they will be compensated.
How does mileage reimbursement work?
There are three ways businesses can handle employee mileage reimbursement.
Employees track the actual expenses incurred by them during the business trip, like gas, parking, and tolls. But, this can be tedious and doesn’t account for depreciation of the vehicle.
Employers provide a lump sum every month to cover the cost of fuel, maintenance, tires, and more. However, this is not tax deductible for the employee and can be pretty inefficient as there is no way to monitor the actual usage of the vehicle for personal and business trips.
Most companies rely on mileage logging for reimbursements. Whenever employees use their personal vehicles for work, they keep track of the distance covered. Employees submit their travel expenses along with the start and end odometer readings to the finance department. This does not include personal trips along the way but only the business miles driven purposes.
List of expenses covered as a mileage allowance
Employees can be reimbursed for the miles driven for business purposes and not for personal detours along the way. A business expense should be both ordinary and necessary, according to the IRS.
Here are some examples of valid gas mileage reimbursement claims that come under the accountable plan:
- Temporary jobs – Travel expenses incurred when traveling for temporary work (that’s expected to last less than a year)
- Client visits – Meeting a customer off-site
- Errands – When you drive to get supplies for the business
- Conventions – Driving to tradeshows, workshops that benefit your business
- Airports – When you use your car to drive to the airport before an international trip
Let’s say Jessica, a salesperson in your company, uses her car to meet with a client 50 miles from your office. She meets her friend who lives ten miles from the client’s place. She returns to the office, having driven a total of 120 miles, of which only 100 miles are for business duties. She gets reimbursed $58 ($0.58 x 100 miles).
The IRS mileage reimbursement rates for 2020
Every year, the IRS decides on a standard mileage reimbursement rate calculated using an annual study of the fixed and variable costs of operating an automobile, like depreciation, insurance, repairs, maintenance, gas, and oil. Also, IRS Mileage reimbursements rates for employees are tax-free.
As of January 1, 2020, the IRS mileage reimbursement rates for cars, vans, pickups, and panel trucks are:
- 58 cents per mile driven for business use
- 20 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
Businesses are not required to follow these rates because the federal rates are mere guidelines. If your business is located in an area where gas and tolls are expensive, you can hike up your rate for the mileage allowance deduction. The amount that exceeds the federal standard become taxable for the employee though and has to be reflected in the tax return.
The best way to handle mileage reimbursements
If you’re looking for a tool to manage your mileage claims, check out Kissflow Finance & Ops Cloud. You can set up and customize forms to automatically calculate the reimbursable amounts based on odometer readings.
After submitting the form, you can create your own workflow to make sure everyone who needs to sign off and approve the form gets to see it. Having an audit trail also helps with record keeping and tax-related activity. With Kissflow Finance & Ops Cloud, you can structure and streamline all your finance processes.