Types of Vehicle Programs

Employers generally provide for their mobile workers’ business travel in two ways. By reimbursing them for using their personal cars or by offering company-provided vehicles. Reimbursing personal vehicle use can come in the form of a car allowance or a mileage reimbursement. Vehicle programs are essential business tools for company operation. Still, they’re most helpful when the company administers them fairly and accurately.

With a mileage reimbursement, car allowance or fleet program, that can prove difficult. In recent years, the IRS has been auditing mileage more often, and as anyone who’s been audited can attest, there’s few more distracting or disruptive exercises your organization can be put through.

Why Accurate Mileage Reimbursement Matters

Your employees must record, document and report every reimbursed business trip taken in their personally-owned vehicles. The IRS requires this documentation in the event of an audit. This is not as simple as asking your employees the total number of miles they drove or collecting receipts. The IRS requires a wide range of information when reporting mileage expenses:

• the business mileage
• date
• destination
• business purpose

Mileage Fraud and Mileage Log Accuracy

Some companies still trust their employees to track business mileage manually. Unfortunately, this often results in mileage fraud or incomplete mileage logs. Without complete mileage logs, your employees can’t substantiate their business travel and reimbursements. Without substantiation, they could fail their audit. The employee would be responsible for paying penalties and back taxes. This raises an important concern. A failed audit could cause the IRS to take a deeper look into your other mobile employees and your company as a whole.

Tax Waste in a Car Allowance

With a traditional car allowance, employees receive a flat stipend. The remains the same each month. However, because the stipend is not substantiated by mileage, the IRS considers it additional income. That means employers are taxed paying it and employees are taxed receiving it.

Making an Allowance Accountable

Companies with car allowance programs can avoid excessive tax waste by implementing an accountable program. With an accountable allowance, driving employees capture their business mileage and submit it in compliant mileage logs. The stipend they receive will be untaxed up to the IRS mileage rate. The IRS will tax any amount over that as additional income. For this to work as intended, mileage logs must be both compliant and accurate. Again, this is can prove to be challenging with manual mileage logs.

Measuring Fleet Personal Use is Critical

Company-provided vehicle programs are the most expensive vehicle program option. Still, many employers find that fleet vehicles can be a great tool for their mobile workers. Of course, this depends on whether the company administers their fleet program correctly. Without accurate records of the business and personal mileage put on fleet vehicles, a company could find itself on the wrong side of an audit.

Why track personal mileage in a company vehicle?

That might cause you to pause and ask: wait, if it’s a company-owned vehicle, I don’t have to track my business mileage, right? Wrong. Most companies that offer fleet vehicles to their driving employees allow them to drive the vehicle for personal reasons. The IRS views this as a taxable benefit. Companies may implement a personal-use chargeback. However, if employees do not substantiate this with mileage logs, it exposes the mobile worker to audit.

Tracking Business and Personal Mileage

Tracking business and personal mileage sounds simple. However, it becomes very complex when accounting for commute mileage. Many employees consider the miles driven from their home to their place of employment business mileage. The IRS does not. It considers these “commuting miles.” Employees must treat these as non-deductible, personal mileage. This may seem obvious for traditional office-based employees. However, the distinction can be lost on workers who use fleet vehicles outside of traditional work hours or those who perform most of their work on the road.

Those employees who don’t regularly report to a traditional corporate office should know how the IRS views mileage. Generally, they consider the miles driven from their home to their first work location and from their last work location back home commute miles. Many mobile workers (and employers) are unaware of this distinction  and mistakenly report these trips as business miles. This results in inaccurate fleet personal use reporting and increased risk in the event of an audit (and often additional fees). Additionally, there are lost costs of having under-applied any personal use chargebacks.

Technology Can Help

In the face of audit risks and tax waste, what’s an employer to do? Tracking and reporting accurate personal and business mileage used to create significant administrative burdens for employers and employees. Luckily, this is no longer the case. Companies now, more than ever, are leveraging GPS-enabled smart devices, cutting-edge software, and comprehensive vehicle management solutions to capture all of their employees’ business mileage expenses.

Business Mileage Reimbursement or Fleet Vehicle

Mobile workers driving personal vehicles or company-provided vehicles can use the same technology that’s empowering the new digital workplace to collect, store and report business travel information to the IRS. This is all without the mountains of paperwork manual pen-and-paper mileage logs create. Employers can leverage   to automate employee mileage tracking and accurately differentiate their employees’ exact business, commute and personal miles. Again, that’s regardless of whether they’re being reimbursed or driving a company vehicle.

With the right mobile applications and software platform, employers can eliminate manual tasks in the field (ultimately increasing productivity), reduce costs and ensure IRS compliance. What’s more, they can gain insight into driving behaviors and mobile workforce efficiency.

The Bottom Line

Inaccurate vehicle programs cost employers thousands of dollars per employee every year and increase the risk of costly audits. Companies that rely on inaccurate programs can’t verify workers’ actual travel costs and remain exposed to IRS audit risk.

Fortunately, there’s a simple solution to this issue.

Advances in technology have made manual, time-consuming reporting methods a thing of the past. Whether you use FAVR programs, corporate fleets or a combination of the two, tracking actual driving behavior and ensuring that you’re paying for the true costs of employees’ business travel has never been easier. Your company deserves the peace-of-mind that your vehicle program won’t contribute to the pain of an IRS audit. Ready to learn more about areas where vehicle programs can face liability and compliance issues? Explore in our blog, Vehicle Program Liability and Compliance: What You Need to Know.

Learn More

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What are the different vehicle program options?

There are four major vehicle program options. They include fleet programs, cents-per-mile programs, car allowance programs, and Fixed and Variable Rate (FAVR) reimbursement programs. Each of these has its balance of benefits and downsides. Because of their simplicity and reduced administrative effort, car allowance programs can be very attractive. That’s especially true for small businesses or start-ups looking to get a program in place quickly. But are they the best option for the company and its driving employees?

Is a car allowance the right idea for your company?

Providing all mobile workers $400 a month to cover business travel expenses may save the time of calculating individualized reimbursements. However, this method can cost both employers and employees thousands of dollars each year. Why?

We know that reimbursing employees for all expenses incurred while traveling for work is important. Employees driving their personal vehicles for work see a wide array of expenses. Those include fuel, registration fees, license fees, taxes, insurance premiums, vehicle repairs, vehicle depreciation and more. These costs vary considerably over time and are dependent on the mobile worker’s location. Compare car insurance premiums in Charlotte, North Carolina might cost around $1,285. On the other hand, premiums on the same car could cost $4,259 in Detroit, Michigan.

This perceived complexity in accounting for different costs can seem overwhelming. This makes it easier for companies to chose a car allowance, thinking that this solution is “good enough.” But the drawbacks of car allowances more than offset the simplicity. Ultimately, car allowances create tax waste for both the employer and employee and decrease employee efficiency.

Car allowances result in significant tax waste

Although companies can easily report car allowances to the IRS, they raise a company’s Federal Insurance Contributions Act (FICA) tax liability greatly. Other reimbursement methods can even be paid tax-free. Car allowances aren’t based on actual expenses. Because of this, they’re subject to both FICA taxes for employers and income taxes for employees.

This means that providing a flat monthly allowance of $400 to each employee can cost an organization $430.60, while employees take home only $269.40. That’s $130.60 of tax waste per employee each month.

Car allowances decrease employee efficiency

Car allowance programs encourage mobile workers to drive less for work in order to take home more money. Paying an employee who drives 500 miles per month the same amount as one who drives 1,500 miles per month overpays the low-mileage worker and underpays the high-mileage worker.

This actively incentivizes mobile workers to drive less, or not drive at all. The less they drive, the more allowance they keep. Additionally, the less they drive, the less wear and tear they put on their personal vehicles. As a result, companies end up paying more in allowances while incentivizing employees to spend less time with customers, ultimately decreasing efficiency and productivity. And, for companies whose employees are considered high-mileage and incur additional costs, car allowances introduce the threat of class-action lawsuits, since employees may be able to claim they’ve been underpaid.

There’s a better way to reimburse mileage

No two business trips are the same, so why would a company choose to reimburse all travelers the same amount? Companies that reimburse mileage based on the individual costs of driving for business uncover significant cost savings from their T&E budget. Ideally, companies should reimburse their driving employees tax-free, based on where and how far they drive for work. And ideally, that reimbursement is also IRS-compliant with an automated process that’s easy on the employee.

There are several other vehicle programs that could be configured to meet the needs of your company. It might even be a combination of vehicle programs! Find out all about those programs and why one might be the best fit for your and your team in our blog Vehicle Programs: the Guide to Vehicle Reimbursement Programs.

Read the Blog

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California Labor Code Section 2802

California has seen employees wanting fair reimbursements and employers wanting transparency for decades. It’s been a cycle. And this cycle gave rise to the state’s well known, intricate labor laws. The best representation of this? California Labor Code Section 2802. This law states that employers should reimburse employees for each and every expense that they incur throughout the course of doing business. Employers that do not closely abided by this law suffer the consequences. That includes potential exposure to messy, employee-triggered lawsuits that typically come along with additional fees and interest. To provide a tangible example, in Gattuso v Harte-Hanks Shoppers, the California Supreme Court ruled that employees should be reimbursed for any and every expense they incur (including automobile expenses).

California Mileage Reimbursement

California Labor Code Section 2802 clearly includes automobile expenses. And a big example would be mileage reimbursement. Companies of all sizes across a wide range of industries need their employees to drive for work. Some of those companies provide them with fleet vehicles. Others require employees to drive their personal vehicles for business. Companies should pay their employees for that business use, and that’s what California’s Labor Law states.

Federal vs State Mileage Reimbursement

Every year (and in dire circumstances, more than once), the IRS announces the mileage rate. Employers use this rate to ensure the reimbursements they provide employees with aren’t taxed. And, believe it or not, California has the same IRS mileage rate as every other state. They don’t come up with their own rate. Unlike California, many other states don’t have the labor laws that guarantee employers reimburse employees. But we’re starting to see that change.

Why California?

One essential thing to note? These types of labor laws are not strictly specific to California. The state is home to the nation’s largest population, and many of its citizens are not afraid of political involvement. Historically, California has been a leader in drafting legislation that ranges from the environment to cybersecurity. For these reasons, California is a model other states follow.

Companies Pay the Price for Inaccurate Reimbursements

Companies in California have had to pay millions in settlements in recent history. RadioShack paid a $4.5 million settlement when their policy was found in violation of CA 2802; the company only reimbursed mobile workers if they followed proper company procedure when submitting expenses. Crossmark, Inc., reached a $1 million settlement with nearly 6,000 employees who claimed they were not fairly reimbursed for travel and business-related expenses. Toys “R” Us has been involved in a similar lawsuit for allegedly not fully reimbursing employees who were required to attend offsite meetings (at least seven per year), transport materials, and more. Walgreens recently paid $23 million as part of nine consolidated class action lawsuits filed in California federal court, $1.5 million of which was for violating CA 2802.

Why Other States Are Beginning to Follow Suit 

Make no mistake, this is not strictly a “California problem.” Grave consequences accompany inaccurate or unjustifiable reimbursements for employees. For that reason, other states in the U.S. have already begun to follow the lead of California Labor Code Section 2802. In Massachusetts, employers must reimburse employees for the excess time and expenses that may occur in the event they report somewhere that’s not considered their typical place of work. New Hampshire maintains labor code that states employers should reimburse employees for any expenses that are considered outside of their pre-determined expenses. In the Midwest, both North and South Dakota have labor language that mirrors that of California.

Other states, such as Louisiana, don’t have specific labor laws that directly correlate to California Labor Code Section 2802. Still, they do have certain civil codes that seem to highlight some similarities. Louisiana Civil Code 2298 states that “A person who has been enriched without cause at the expense of another person is bound to compensate that person…[regulation measures] the amount of compensation due… by the extent to which one has been enriched or the other has been impoverished, whichever is less”. As this scenario relates to reimbursement, the employer could be the enriched, and the employee impoverished.

Scholars have been connecting the dots between California Labor Code Section 2802 and labor laws in other states for quite some time now – and for good reason.

Other Ways of Calculating Mileage Reimbursement

What do all the above lawsuits have in common? Each could have been avoided easily with an accurate vehicle reimbursement methodology. When it comes to reimbursing mobile workers for business mileage, employers have a number of options. Some are easier, some are more wasteful, some are more accurate. The most popular methods include car allowance, cents-per-mile and fixed and variable rate (FAVR). Let’s have a quick look at each of them, starting with perhaps the worst option.

Expensing Driving Costs

Hypothetically, a company could have driving employees expense everything. They’d just send in receipts for fuel, oil changes, tolls and everything else. But this would be a nightmare for a number of reasons. For starters, the mobile worker has to submit each of those expenses. You won’t find too many people raising their hands to do that. Then someone has to look through all those expenses. And that’s also a yikes. Finally, companies should be paying for business use, but this doesn’t have an easy way to separate the business use from the personal use. For so many reasons, don’t use this method. Forget you even read about it.

Car Allowance

Car allowances are a popular option because they’re simply. Companies simply pay their drivers a flat sum each month. And that sum doesn’t change, making it easy for finance to budget for it too. Only, these monthly stipends have no connection to the miles people are driving for work. Because of this disconnect, the IRS considers car allowances to be “additional income.” That makes them taxable. Unless you’re using an accountable plan, those taxes really add up.

Cents-per-mile

With this program, also traditionally called a mileage reimbursement, employers pay mobile workers cents per mile. The cents-per-mile reimbursement rate is often the IRS mileage rate we talked about earlier. However, for reasons we get into here, that isn’t always an accurate choice. There is an ideal mobile workforce size and average miles driven. If your company is in that sweet spot, the program works swell. If it doesn’t fit the parameters, there are other options that will make a better fit.

Fixed and Variable Rate (FAVR)

Companies with Fixed and Variable Rate (FAVR) reimbursement programs like them for a few reasons.  For one, it’s a tax-free program. For another, it’s based in IRS methodology and it’s highly configurable. Companies provide employees at rates based on the fixed and variable costs of driving. Fixed costs, or costs that don’t change much, include depreciation, insurance, taxes & fees. Variable costs, or costs that change frequently, include fuel and maintenance.

With the right vendor, these costs are specific to the location each employee drives. When costs in their area shift, the reimbursements update to reflect those changes. This adaptability makes it a great option for companies because cost components can be configured within the guardrails defined by the IRS to create tax-free reimbursements that meet a wide range of business goals.  

Ensuring Accurate Mileage

How can your company reimburse its employees appropriately? The vehicle program you use is the framework, but accurate reimbursements require a record of business mileage. Some companies rely on manual mileage tracking, where employees record the necessary information by hand. Unfortunately, this option can lead to mileage fraud.

The most accurate option requires a mileage capture app. This enables employees to record their miles with pinpoint accuracy and submit them directly from their phone. No more time wasted recording trips on paper. Mobile workers simply set up the app and go about their day!

Other Reimbursement Concerns

As of 2020, California’s Assembly Bill 5 went into affect. This bill changed the criteria used to define contractors and employees. Unless employers could prove three conditions establishing a contract worker, the worker was to be considered an employee. That could have a significant impact on the reimbursement process for certain individuals in the company. You can learn more about AB5 and its impact in our blog.

The Bottom Line

Inaccurate or unjustifiable reimbursement for your mobile workers can land your company into danger, most often in the form of costly lawsuits (some of which can reach close to seven figures). In order to mitigate such risk, companies should look to fair and accurate vehicle programs that will be beneficial in the long run.

Disclaimer: Motus prepared this material for informational purposes only. Motus does not intended to provide, and should not be relied upon for, tax, legal, or accounting advice. Motus does not provide tax, legal, or accounting advice. For any such advice, you should consult your own advisors.

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It’s important to understand why the IRS would audit your company based on how you administer your vehicle program. In many instances, the IRS not only audits the company, but its mobile employees as well. Here are five tips that go a long way toward preventing a vehicle program audit.

Tip 1: Collect IRS-Compliant Business Mileage Logs

Your mobile employees must record their mileage to the standard set by the IRS. This includes capturing the date, destination, business purpose and total mileage per trip for all business trips taken. In order to ensure they do, it’s important to implement policies stating those requirements and educate them on best practices.

Tip 2: Maintain Your Records

Staying on top of your records can make a big difference when facing a potential audit. Although audits typically occur every three years, the IRS can request files for up to six years. In order to prepare for an audit, the IRS recommends keeping those mileage records for seven years.

Tip 3: Understand Commute versus Business Mileage

According to IRS Definition Publication 463, daily transportation expenses you incur from your home to first place of business (and vice versa) are generally considered “commute.” Driving employees cannot deduct or expense this travel as business mileage. It’s important to be aware of a few different types of scenarios that are exceptions to the rule:

Scenario 1: Your employee has a Regular Office.

If an employee drives from home to a corporate office or main place of work (and vice versa), the IRS considers it commute mileage. There might be an instance in which an employee travels directly from home to a customer meeting, airport or work location that is not considered their primary or designated place of work. The IRS considers that business mileage.

Scenario 2: Your employee has a Home Office.

Say an employee has a home office that qualifies as a principal place of business. The IRS considers any mileage driven between home and any work location business mileage. For example, you work a 40-hour work week, 20 or more of those hours from home. The IRS considers any miles driven for work business mileage.

Scenario 3: Your employee does not have a work or home office.

An employee who drives between their home and temporary work site within their own city may consider this commute mileage. Alternatively, an employee who drives from their home to a temporary work site that is outside of their city may consider this business mileage.

Tip 4: Automate with Technology

How can all of this be avoided? Ensure employees understand these policies and attempt to automate processes for your employees. Manual mileage logs leave room for error given the need for an employee to remember exactly where they went, when they went, and the route they took to get there. This happens to be one of the main reasons the IRS audits employees. Leveraging a mileage capture app allows your mobile employees to set it and forget it, all while creating IRS-compliant mileage logs.

Tip 5: Understand what the IRS considers to be a “perk”

The IRS considers the majority of expense reimbursement plans Accountable Plans. These have one or more of the following conditions:

• A business reason for the expense exists,
• Receipts serve to substantiate the expense,
• Employees must return excess reimbursements within a reasonable time (usually within 60 days of travel).

If the plan DOES NOT meet one or more of the above conditions, the IRS considers it a Non-Accountable Plan. This means the IRS see amounts reimbursed as income to the employee and should be included on his or her W-2 as taxable income. It is recommended that you abide by the following scenarios in order to eliminate the chance of penalties and back taxes in the event of an audit:

Personal use of company-provided vehicles

Your organization should require the tracking of personal use on your company-provided, fleet vehicles. This personal use must be included as taxable income on the employee’s W-2 or deducted through a chargeback.

Substantiated reimbursements exceeding the IRS Standard Mileage Rate

Your organization should ideally have receipts or records to prove actual costs. Companies concerned with substantiated reimbursements often adopt a Fixed and Variable Rate (FAVR) Reimbursement Program.

Overcoming Compliance and Liability Concerns

As far as compliance and liability concerns go, an IRS audit is near, if not perched at, the top of the list. But companies with programs of all shapes and sizes have other concerns. Fortunately, most of those can be corrected if caught early enough.

Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice. Motus does not provide tax, legal or accounting advice. For any such advice, you should consult your own advisors.

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The Facts of Mileage Fraud  

According to a Chrome River Survey, roughly 5% of respondents revealed that they had committed some version of expense fraud. At first glance, this percentage may not appear all that astounding, but just think: if even 25 of your 500 mobile employees are falsely reporting mileage, there is no way to justify this as being beneficial for your organization. 

You may be thinking, “Perhaps employees lack a certain understanding of the process and are just making honest reporting mistakes, could this be the case?” This could be the case for some, but there’s a much larger issue at hand. Mileage fraud happens because of a lack of insight into how mobile workers are recording their mileage and a way to verify their distance. 

Most Common Forms of Mileage Claim Fraud  

Mileage fraud isn’t one action or infraction. There are several ways mileage fraud may sneak into the workplace. Those ways include falsifying journeys, exaggerating distances, merging personal and business trips and claiming for shared journeys. Let’s take a look at each of these in further detail. 

Falsifying Journeys 

This one is simple. Without insight into your mobile workforce, an employee can simply invent a business trip and claim mileage for it. It’s unpleasant to think someone might just make something up to receive a reimbursement. It’s unlikely to happen as consistently as other methods of mileage fraud, but it is a potential product of a program that lacks oversight. 

Exaggerating Distances 

When filling out manual mileage logs, an employee might look at their odometer and round up. If they drove 19 miles, for the trip, they might call it an even 20.  This is the most common method of mileage fraud. And it seems fairly harmless. What’s a few cents for each mile? Well, there are a few things to consider. 

First, consider the mileage reimbursement rate the company is using. At the IRS mileage rate, it’s over 60 cents per mile. Now, consider that the example above is one trip in a day. Multiply that rounding process across all the trips in their day, or all the trips in their week or month. This snowball effect grows quickly and can cost your business a lot of money. And if one mobile worker is doing a little rounding, you can bet they aren’t the only one. 

Merging Personal and Business Trips 

Let’s say an employee who drives for work needs to run a personal errand. So, following a business meeting with a client offsite, they drive to the store. Done with their errand, they proceed to a meeting with another client. At the end of the day, they mark that little errand as a business trip. After all, they did end up going from one business location to another. They just had a small detour. 

This is another example of mileage fraud that might not seem like a big deal, but it can add up quickly. It’s perfectly okay for a driving employee to take some time out of their day to run an errand. It isn’t okay to include it as a business trip. Unfortunately, companies with no insight into how their mobile workforce records their mileage won’t catch this issue. 

Claiming for Shared Journeys 

Two employees are needed to assist at an offsite location. Because they’re going from the same place to the same destination, they carpool. At the end of the day, the driving employee submits their mileage log. And, because they could’ve driven too, the person that carpooled with them submits a mileage log as well. In many ways, this is falsifying a journey. Not because the trip didn’t happen. It did. But, whatever rationale they have for submitting business mileage when they didn’t drive their personal vehicle, it’s still mileage fraud. Again, a vehicle program without oversight isn’t likely to catch this. 

The Root of the Mileage Fraud Issue 

Part of why this phenomenon appears to be a recurring theme is the old, nation-wide way of reimbursing mileage expenses. The vast majority of companies continue to require their mobile employees to submit their mileage reports via paper mileage logs or Excel spreadsheets. These processes allow employees to create their own destiny. They have free rein to submit reports at their personal discretion. This can lead to both inaccuracy and unearned cash in the pockets of your workforce. Not only can this be extremely costly for your company, but also for your employees if the IRS decides to come knocking. 

Preventing Employee Mileage Reimbursement Fraud  

So your program relies on manual mileage logs, which provide little to no insight into your mobile workforce. That doesn’t mean the company is doomed, past the point of no return. There are plenty of steps you can take to get your program on the right track. Here are a few to consider: 

1. Create an effective mileage reimbursement policy. This doesn’t just mean waiting for the IRS to release their annual mileage rate and continuing to use that measure as a reimbursement. This means creating a policy that outlines which roles require driving and which employees don’t. This means taking a look at your current vehicle reimbursement program and asking if it’s the best fit for your company. It means exploring other options to make sure there isn’t something better.
2. Separate the processes of mileage reimbursement and employee compensation. What’s the difference? Employee compensation is generally seen as a package, offered to entice potential candidates. A company might not be able to offer them a higher salary, but they can provide a monthly car allowance. However, this form of compensation isn’t tied to business driving, making it taxable. It also offers no visibility into the mobile workforce. On the other hand, mileage reimbursements depend on mileage logs. Without a mileage log, driving employees receive no reimbursement.
3. Implement a review process and consider using a mileage tracking app. This option will help your company cut down on falsified journeys, shared journey mileage claims and mileage logs that fail to meet IRS standards for compliance. That review process comes at a price: increased administrative burden. Depending on the size of the mobile workforce and the level of mileage driven, this may be work for several employees.
4. Conduct periodic reviews and audits for compliance. Your company performing reviews and audits internally helps in two ways. One, you will hopefully uncover and get to the root of mileage fraud problems, potentially saving your company in mileage overspend. Two, in the event of an IRS audit, you will hopefully have caught and fixed any red flags. As with the above, reviews and audits take time and require increased administration from employees.
5. Automate the reimbursement process to improve mileage verification. This may be the last item listed, but it should be the first effort for a number of reasons. With the right vendor, employees capture their trips using the GPS in their phones and submit their business miles in IRS compliant mileage logs. This also cuts down considerably on the need for audits and reviews. 

Advancing With Automation  

In order to reduce your organization’s risk of car mileage fraud, automation should be a top priority. As documented by a Forrester Research survey of finance leaders, 73% of respondents confessed they would be re-evaluating and modifying their T&E systems within six months. Simply put, the purpose of technology is to make people’s lives easier. As it turns out, mileage reporting and reimbursement should be no different. 

With automated mileage tracking and reporting technology, your organization will immediately gain more visibility and insight into expense reports. That allows your company to reduce costs due to car mileage fraud. Even further, your company could benefit tremendously by opting for IRS compliant, fixed and variable rate reimbursement programs. 

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What’s the IRS mileage rate?

The IRS rate is a guideline for mileage reimbursement. That means employers can reimburse employees for their business mileage at this rate. As long as a company does not set their allowance or cents-per-mile reimbursements above this rate, the reimbursement is not taxable. Unfortunately, for some companies this is easier said than done.

Below is a list of the rates since 2011.  

 As you can see, the IRS mileage rate isn’t the only rate listed. So what are these other rates?

Charity

This rate is not related to business mileage. If you’re doing charity work that requires driving, you may be able to deduct those expenses from your taxes. There are some standards that must be met though.

• The charitable organization must be certified.
• You can’t claim miles driven if you’ve already been reimbursed.
• The claimed mileage must be connected to the miles driven and only for that intended purpose.
  • You shouldn’t be claiming the beverage you purchased with the gas prior to the trip, and it can’t have been conveniently on your way home from work.
• It cannot be a personal, living or family expense.

If your drive meets those standards, you can deduct 14 cents per mile for travel to and from the place (including tolls and parking fees). Or, and this might be better, you can deduct actual variable costs, like, for example, the cost of gasoline. Because 14 cents per mile isn’t covering the cost of the drive, deducting the variable costs is likely the best method.

Moving

According to Section 217 of the U.S. tax code, you can deduct the expenses of moving household goods/personal effects and travel. The moving rate applies to moving travel mileage. There are two ways to deduct the cost of moving: at the standard mileage rate or the actual costs. As with the charity rate above, claiming actual costs is probably the best of the two options.

Medical

Under Section 213 of the Internal Revenue Code, one can deduct for miles driven to get medical care, treatment, etc. This includes trips to the doctor, dentist or other trips with medical purposes (getting prescriptions, attending therapy sessions). Note that traveling nurses and other employees in the medical field would not use this deduction for their business mileage. Their travel falls under the category of business travel, which was impacted by the TCJA beginning in 2018. 

A Number with Many Names

The IRS mileage rate also has several names. These include, but are not limited to: the IRS Safe Harbor rate, the standard mileage rate, the IRS mileage reimbursement rate, the federal mileage rate and the business mileage rate. Know that all of these names are the same thing. Any variation is for style points. In all its forms, the IRS rate remains a reimbursement guideline. That will not change when the 2023 mileage reimbursement rate is announced.

What factors determine the IRS Mileage Rate?

The IRS mileage rate is determined as a guideline for business mileage reimbursement. When most people hear “business mileage reimbursement,” they think fuel costs. But if you think about it, it’s easy to see there are more expenses to driving than just fuel prices. Here are a few of the contributing factors. 

The Cost of Fuel

Fuel is not the only expense, but it’s still a major factor. This isn’t just how prices change at the pump. It’s what makes those changes. Is fuel production stable? Are producers competing for market share? Are they cutting back on production? The economy can also greatly impact fuel trends. In a down economy, as shipping demands decrease, fuel demands decrease. If the economy is booming, fuel demand keeps up with shipping needs.

Vehicle Maintenance

Even new cars require an oil change a few times a year. Oil changes, and other vehicle maintenance needs like replacing tires and filters, can rise depending on how much use they see. Vehicle maintenance is generally considered to be recession proof. When the economy is doing poorly, people with vehicle problems still need to fix them. Vehicle maintenance costs have been on a rising trajectory for some time and doesn’t seem likely to drop anytime soon. 

Insurance Rates

Accidents happen. More vehicles on the road, a higher rate of accidents. Distracted driving also increases the rate of accidents, and there’s plenty to be distracted by. As a result, insurance rates trend higher. While the cost of insurance may change with the seasonal surging and shrinking number of people on the road, it’s still a cost drivers pay. For that reason, it influences the IRS business mileage rate. 

Vehicle Costs

Clearly, vehicles are necessary for driving. Thus, their costs are a factor in deciding the IRS rate. And vehicles have been more expensive with each year. Some of that is a change in taste. Buyers are looking less for traditional sedans and more for compact SUV’s, hatchbacks and trucks. A good deal of it is new safety features. Back up cameras, lane departure warnings, assisted braking and pedestrian detection? Vehicle owners can appreciate these measures at increased costs. 

Credits and Deductions: No More Tax Deductions

Before 2016, employees could write off unreimbursed business mileage at the IRS business mileage rate as a deduction. However, since the Tax Cuts and Jobs act, that is no longer an option. Hopefully, your company has taken appropriate steps to make up for that with a reimbursement. If not, you could be facing some legal trouble.

Why do so many companies use the IRS mileage rate for reimbursement? 

Companies use the IRS mileage rate as their reimbursement for a number of reasons. First, it’s relatively easy. Using the mileage rate set out by the IRS means the company doesn’t have to spend resources determining a rate of their own. Another major reason is reimbursing at the federal mileage rate is tax free. Given how much companies can lose to tax waste, that’s a big draw. 

Why are other reimbursements taxable?

Reimbursements can be found taxable for two major reasons. The first is substantiation. If a reimbursement is paid out but isn’t tied directly to mileage, that reimbursement is considered additional income. This is a major issue with the car allowance vehicle program. 

The second reason is reimbursing at the rate above the IRS mileage rate. Again, this is considered additional income and is also taxed as regular wages to an employee would be. In both cases, employers pay more and employees receive less.  

Issues with the IRS Mileage Rate 

As stated earlier, the IRS mileage rate is a guideline. As long as a company reimburses at or below that rate, reimbursements are not taxable. However, this guideline is determined by factors from the previous year. If your company is currently reimbursing its driving workforce at the current IRS rate, we recommend looking at alternatives for these reasons: 

• Reimbursing at the IRS rate isn’t fair to your employees. Some driving employees will be under reimbursed, others will be over reimbursed. 
• Location affects the costs of fuel and maintenance. This also makes the reimbursement unequal. 
• Companies use the IRS business mileage rate for reimbursement, but that isn’t what it was established for. The IRS enacted the rate as a cap guide.  

How should your company prepare for the IRS mileage rate change?

Companies preparing for the IRS standard mileage rate change should review their reimbursement process to ensure they’re prepared come January of the next year. That might mean connecting with an in-house team or an outsourced vehicle reimbursement provider. The rate can change up or down, depending on the influences listed above. Don’t make the avoidable mistake of over-reimbursing employees because the first of the year slipped by. 

Switching From the IRS Mileage Rate

The best course of action when considering a move from a vehicle program is exploring other options. There are several popular vehicle reimbursement programs: car allowances, company-provided vehicles, cents-per-mile and Fixed and Variable Rate (FAVR) reimbursement. But of these, there is only one truly equitable vehicle program option. In fact, the Fixed and Variable Rate (FAVR) reimbursement is the only IRS recommended reimbursement methodology. Why? Let’s break down the cost of vehicle ownership into two camps: fixed and variable.  

Using FAVR Plans

Fixed costs are made up of insurance payments, registration, and license renewal fees. These are considered “fixed” costs because they change very little. Then there are variable costs, which include fuel, tires and general maintenance. These costs are considered “variable” because these prices fluctuate far more frequently. Unlike any other program, the Fixed and Variable Rate (FAVR) program accounts for both the fixed and variable costs of vehicle use. With the right company, reimbursements are specific to each individual driver and the place they operate. Interested in learning more about vehicle programs? 

Knowing Which Vehicle Program Is Right For You 

Mileage reimbursement at the IRS rate and FAVR are just two of the most common vehicle programs. We mentioned the others above, but didn’t dive in too deep. Looking for an alternative to the IRS rate? Or just to learn more about your vehicle program options? Check out our blog that details the options available to your company.  

Learn About Vehicle Programs

The post What is the Current IRS Mileage Rate? How Does it Impact Your Business? appeared first on Motus.

What are mileage logs?

Mileage logs are an important tool for all mobile workers. They capture business mileage, allowing employees to then submit them for reimbursement. Used correctly, mileage logs create a clear picture of personal and business usage. In the event of an audit, an accurate and compliant mileage log makes a strong case.

Consequences of Inaccurate Mileage Logs

Unfortunately, both employees and employers often incorrectly classify business and personal mileage. This is especially true with commute miles. Many are also unfamiliar with the full range of details they must report (everything from miles driven to business purpose for each trip). These misunderstandings often result in incomplete or inaccurate paper mileage logs. Let’s look at some common areas for inaccuracies and the consequences involved with each.

Commute Mileage

Commute mileage is the distance employees drive from their homes to their regular place of work and back again. The IRS generally considers commuting costs a personal expense. This means they’re not deductible. Employers usually don’t need to (and shouldn’t) reimburse employees for their daily commute.

This is straightforward for traditional office workers. But what about mobile workers? Drivers who typically work in the field and make multiple work-related trips throughout the day? In general, the IRS considers the miles driven from their home to their first work location commute mileage. Same goes for the miles from their last work location back home. Many mobile workers are unaware of this designation. This results in drivers mistakenly reporting their first and last trips of the day as business miles to be reimbursed. Not only does this increase risk in the event of an audit, it also increases costs for employers over reimbursing employees for these miles.

Drivers make this error each day. The more drivers you have, the more the error is made. The costs quickly add up to tens of thousands of dollars wasted annually. Add on a failed IRS audit, and the costs compound through taxes and penalties.

IRS-Compliant Mileage Logs

Every business trip must be tracked and documented to substantiate mileage reimbursements. Plenty of companies collect total mileage from employees. However, the IRS requires a wide range of information that many employee mileage logs fall short of covering. To meet IRS compliance standards, the mileage, date, destination and business purpose must be recorded for every business trip. Because business travel expenses have been reported incorrectly so often in the past, the IRS now focuses on auditing these deductions in particular.

Failing to follow their guidelines completely can result in more than just an administrative headache: A California business owner’s handwritten mileage logs cost him a $5,309 deduction plus an accuracy penalty when an IRS audit found his mileage logs fell woefully short of their standards. A mobile worker in Missouri saw her $8,340 deduction for driving 18,741 miles replaced with a $2,430 deficiency that she had to pay as the result of an IRS audit. The U.S. Tax Court disallowed her mileage deduction even while admitting that she likely drove her vehicle for business use. The reason? Her daily mileage logs noted only odometer readings, not all the information the IRS requires, and did not differentiate between business, commuting and other personal miles.

Personal-Use Mileage

When people think of vehicle programs with mileage logs, they think of mileage reimbursement and fixed and variable rate programs. Maybe an accountable allowance. People don’t think about company-provided vehicle programs. If the company owns the vehicle and covers gas costs, why record mileage?

The IRS considers personal-use a taxable benefit. For this reason, companies must charge for personal use of fleet vehicles. Most companies simply charge a flat amount across their mobile workforce each year. However, without an accurate record of personal use mileage, companies and their employees expose themselves to audit. Organizations also stand to lose money via inaccurate personal-use chargebacks.

Automated Mileage Tracking Solutions

In the past, mobile workers had to create, maintain and report detailed mileage logs by hand, for every single business trip. Fortunately, this is no longer the case. Mileage logs, like most of our business processes, have gone digital.

Instead of pen-and-paper mileage logs, employers can leverage GPS-enabled smart devices to automate employee mileage tracking and accurately differentiate their employees’ exact business, commute and personal miles. With the right mobile applications and software platform, employers are able to eliminate manual tasks in the field. The result? Increased productivity, reduced costs and IRS compliance. On top of that, employers gain insight into driving behaviors and mobile workforce efficiency.

The Bottom Line

Mileage logs are a key tool for effective mobile workforces. However, they’re only useful when they’re complete and accurate. Failing to document all the information required by the IRS—everything from miles driven to the purpose of each visit—can land company and employee in hot water. Luckily, mileage capture apps have made creating, maintaining and reporting accurate mileage logs easier than ever. Those who ditch last century’s paper mileage logs for digital options see the benefits immediately. And those who continue to wait? They risk inaccurate, costly mileage reimbursements and the ever-present threat of being unprepared in the event of an audit.

The post The Importance of Accurate Mileage Logs appeared first on Motus.

What Are Mileage Deduction Rules?

If you are self-employed and use your vehicle for work, charity, medical, or moving purposes, you might be able to take a mileage deduction for the self-employed. This deduction can reduce your taxable income and minimize your total tax liability. Alternatively, individuals can use the actual car expense method. The difference in rules between the two methods are noted below:

• Standard mileage rate: This is a tax write-off for mileage set by the IRS based on miles driven and is considered the easiest method for those who are self-employed; the rate covers everything pertaining to using a car for business.  
• Actual car expense method: This allows you to claim deductions for car insurance, deductible repairs, and more. While it is more comprehensive in what it allows you to deduct, it requires you to keep track of a greater number of expenses beyond mileage, which takes more time and effort. According to the IRS, business owners and self-employed individuals can deduct the following expenses using this method:
  • Garage rent
  • Tires
  • Insurance
  • Lease payments
  • Gas
  • Parking fees
  • Tolls
  • Oil
  • Registration fees
  • Depreciation
  • Repairs

Keep in mind that the IRS might want to see documentation when writing off miles for taxes. Do your best to keep receipts and records of your mileage and expenses for gas and maintenance. Otherwise, you could face audits and penalties.

Standard Mileage Tax Deduction Rates

For the 2023 tax season, the standard mileage business deduction for miles driven between January 1 and December 31, 2022, was 65.5¢ per mile, which includes the costs of gas, maintenance and repairs, depreciation, and general wear. In 2024, this rate has gone up to 67¢ per mile. For medical and moving, the deduction is 21¢ per mile, and for charity driving, it’s 14¢.

Who Is Eligible for Mileage Tax Deductions?

The IRS has determined that if you want to claim the standard mileage deduction, you need to be the owner of the vehicle you use — or at least be leasing it.

• To qualify as an owner, you have to use the standard mileage rate during the first year you use the vehicle to conduct business. After that, you can choose between the standard mileage rate and the actual expense method. You may not use a fleet (more than five cars) at once, though you may use all the vehicles at different times. Additional qualifications include not claiming a section 179 deduction for your vehicle’s special depreciation allowance or taking deductions with anything but the straight-line method. 
• If you’re leasing, you must also use the standard mileage rate in the first year of business using your car and continue using this method for the whole life of the lease — even if you renew it. Those leasing their car(s) may not apply this deduction to fleet operations, either.

Prior to 2017, all employees could claim an un-reimbursed mileage tax write-off for travel expenses related to work. However, the Tax Cut and Jobs Act of 2017 suspended this deduction. The IRS doesn’t provide much additional detail on the mileage deduction eligibility requirements, but those who generally qualify include:

• Small business owners, including self-employed individuals filing with Schedule C or F
• Qualified performing artists
• Fee-based government employees
• Individuals traveling for medical reasons or volunteer work
• Armed forces reservists
• Freelancers
• Independent contractors

Mileage Deduction Rules for the Self-Employed

If you are claiming the mileage deduction as a self-employed individual, you’ll need to use Schedule C to report the mileage driven for business during the tax year. You should also indicate the date you began using the car for work and answer a few additional questions. 

It’s important to know what counts as business mileage in this report. You are only allowed to count trips taken after you’ve arrived at work. As a business owner, this means you may only count the trips taken from your work location to other locations of business, not to and from your home. Rideshare drivers, for example, can start counting their miles after they arrive at the home of their first passenger but not the ride from their starting point to the first passenger’s location. IRS Publication 463 provides additional detail.

Mileage Deduction Rules for Other Employees

Other employees can take a mileage tax write-off using Form 2016 to report miles and answer vehicle-related questions. The same mileage deduction rules for the self-employed apply to all other employees.

What You Can Claim

Here are specifics on what you can claim as a business mileage tax deduction:

• Trips From One Office to Another. You can deduct any miles incurred as a result of traveling from your office or work site to a second work location.
• Temporary Work Location. A temporary work location is “a place where your work assignment is realistically expected to last (and does in fact last) one year or less.” If this temporary location is your primary workplace, you can only deduct mileage between your home and the location if it’s outside of your normal metropolitan area. (If you have another regular workplace in addition to this temporary work site, you can deduct any mileage between your home and the temporary location.)
• Customer and Client Visits. Any mileage driven from your office to meet with customers, clients or business vendors can be deducted.
• Business-Related Errands. Miles incurred while running any business-related errands (i.e., trips to the bank, post office, etc.) can be claimed.
• One-Off/Secondary Jobs. Any travel incurred while working secondary jobs to make some extra cash (such as landscaping or housesitting) can be written off. This is only true if it is not a day off from your main job.
• Job Seeking. Any miles driven to find a new job in your current occupation are eligible for a deduction as long as you’re not looking for your first job.
• Medical Appointments. This includes driving to and from doctor’s appointments or picking up prescriptions.
• Volunteer Work. If you volunteer for a charity and need to use your vehicle to get there or to participate in the charity work itself, you might be able to claim the tax deduction.

What You Can’t Claim: Mileage Tax Deduction Limitations

It is important to note that employees can only claim business mileage. The IRS considers any travel from your home to a permanent work location commute. The same is true of travel to a principal location where you work for more than one year. The IRS does not consider any miles incurred during your daily commute to be eligible for a deduction.

Depending on the Tax Year, you can claim “X” (whatever the IRS rate is for that year) cents per mile as part of unreimbursed employee expenses, but only expenses over two percent of your adjusted gross income can be deducted. (If you are an independent contractor, or you’re self-employed, this two percent floor will not apply.) However, you are not eligible for a deduction after you have claimed any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, you cannot apply the standard business mileage rate to more than four vehicles used simultaneously.

In addition to the limitations on fleet operations and on those who claim the Section 179 deduction or use another depreciation deduction besides the straight-line depreciation method, you may also be disqualified from claiming the standard mileage rate deduction if you are a rural mail carrier receiving reimbursement or claimed actual car expenses for a leased car post-1997.

Other Considerations

When writing off miles for taxes, it’s vital to keep accurate records of your mileage and expenses to support any deductions claimed on your tax return. If you are selected for an audit (over one million audits occur each year), the IRS will want to see your mileage logs that include dates, destinations, and the reason for travel. Remember to also keep receipts for toll and parking fees, which may need to be claimed separately depending on the deduction you choose. If you deduct toll or parking fees, the IRS will require you to keep receipts of every transaction that show the amount, date, and location of each expense. 

Your mileage should be comprehensive and should be tracked while you’re on the job, as it will be more accurate than if you tried to backtrack later on. This can be done on paper, but now, smartphone apps make your mile tracking easier and more accurate. 

Another consideration to keep in mind with a tax write-off for mileage is that you may not claim both the actual expenses and mileage tax for a single vehicle in the same year. It’s best to consult with a tax professional or use a tax software program to ensure you are accurately and appropriately claiming miles on taxes.

Maximizing Your Return

Claiming miles on taxes can add up to a substantial deduction for many taxpayers, but the IRS has specific mileage deduction rules regarding when and how it can be claimed. If you are uncertain about the rules we’ve discussed above, consult with a tax professional who can evaluate your particular situation.

For further clarification on business versus commute mileage, read more here!

Read More

Disclaimer: We prepared this material for informational purposes only. It is not intended to provide, and should not be relied upon for, tax, legal or accounting advice. Motus does not provide tax, legal, or accounting advice. For any such advice, you should consult your own advisors.

The post Mileage Deduction Rules: Claiming Unreimbursed Mileage on Your Tax Return appeared first on Motus.

The Shortcomings of the IRS Mileage Rate

The problem with using the IRS rate for mileage reimbursement? The IRS does not recommend it as a reimbursement rate. Its main purpose is to serve as a base rate for individuals to calculate a tax deduction for their unreimbursed driving expenses, a tax deduction that is no longer available.

Each year, the IRS mileage rate is based on the previous year’s average costs of operating a vehicle. This means the rate is inherently inaccurate. It’s not reflective of current prices, and it’s based on nationwide averages, rather than location-specific costs. As a result, the IRS mileage rate is best suited for employees that do not drive often for business. Companies generally consider driving more than 5,000 business miles annually “often.”

Drawbacks of the IRS Rate for Mileage Reimbursement

Some may argue that using the IRS rate for all employees creates a uniform method of reimbursement. In reality, companies using this rate will over-reimburse some employees and under-reimburse others. Take for example, a Los Angeles, California employee paying $6.50  a gallon for gas. Now compare that to a Hanover, New Hampshire employee paying $4.90 a gallon. The California employee receives the same reimbursement per mile but is spending $0.80 more per gallon. Differences in other driving costs could further heighten this discrepancy.

The costs of gas, insurance, maintenance, license fees and other general vehicle expenses vary widely across the country. Mileage reimbursement rates should as well.  Only the fixed and variable rate (FAVR) methodology – which is the IRS’s only recommended reimbursement approach – ensures this is the case.

Other Vehicle Program Options

Using the IRS mileage rate is a popular vehicle program option. But it isn’t the only option. As mentioned earlier , other popular mileage reimbursement options include using a cents-per-mile rate other than the IRS mileage rate or car allowances. We’ll spell those out in more detail below.

Cents Per Mile (CPM)

Earlier we shared that the IRS mileage rate is a guideline. As long as a company reimburses at or below the IRS mileage rate, mileage reimbursements remain untaxed. That means companies can control mileage spend by reimbursing at a more reasonable rate. However, like the IRS mileage rate, CPM programs can also have issues.

For one, the spend can vary drastically month over month. Depending on the industry, certain months may require more driving than others. This makes accounting for mileage spend in the budget much more difficult. Additionally, CPM programs reward high mileage drivers. The more miles they drive, the higher their reimbursement.

Ideally, companies with a CPM program have a regional pool of drivers that travel no more than 500 miles each month. Businesses with driving employees spread across a larger area and operating with widely varying mileages might be better off with another program.

Car Allowance

Car Allowance programs are incredibly easy. Companies pay their driving employees the same stipend month over month. But with that simplicity comes a large amount of tax waste. Because the stipends are not substantiated with mileage logs, the IRS considers each car allowance additional income. That means its exposed to income tax on both the employer and employee.

A car allowance also fails to accurately reimburse employees for the same reason the IRS rate and CPM programs do. One payment (or rate) applied to all driving employees creates winners and loser. Driving employees that live in areas with low vehicle ownership costs will be able to make use of left-over funds in their stipend. On the other side of the scale, driving employees in high-cost areas may stop driving for business once the stipend stops covering their expenses.

A More Accurate Vehicle Program

We walked through why the IRS mileage rate isn’t the best option. We also explained the shortcomings of CPM and car allowance programs. This raises the question: is there a vehicle program that fairly and accurately reimburses employees? Luckily, there is. And it’s called the Fixed and Variable Rate (FAVR) reimbursement program.

The FAVR methodology provides each employee with a tax-free reimbursement aligned with their fixed and variable driving costs. FAVR calculates the fixed costs (i.e. insurance, taxes, depreciation) for each individual based on where they live. The variable costs (i.e. gas, maintenance, tires) are based on distance traveled and current gas prices in an employee’s driving territory.

Reimbursing employees based on their location and mileage-specific costs makes the FAVR methodology the fairest and most accurate reimbursement option a company can choose.  It may seem more difficult to adopt than simply using a CPM rate or stipend for all employees, but the benefits of providing both tax-free AND accurate reimbursements make FAVR programs a far superior mileage reimbursement method for most companies. By paying the right amount, companies can eliminate over and under-reimbursements – providing cost savings and mitigating legal risk. They can ensure all employees are treated fairly.

Getting Started with FAVR

With the right vehicle program vendor, getting started with FAVR is easy. However, finding that vendor and vetting them can take time. These initial steps can help you get a FAVR program off the ground.

1. Determine the annual mileage your driving employees drive.
2. Compare the gas prices that your employees deal with on a daily basis.
3. Select the right vehicle program vendor.
4. Work with your vendor to create an implementation plan.

Interested in seeing if FAVR might be the right program for your company? Or just interested in learning more? You can find out more about the Fixed and variable rate reimbursement program and how it can benefit your company here.

Learn More Here

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