Sometimes employees have to hit the road to get business done. But if they’re on a mission for work, they shouldn’t shoulder all the travel expenses. That’s where mileage reimbursement comes in.
Mileage reimbursement is a mutually beneficial opportunity to receive tax reductions for both the employee and the employer. Unfortunately, providing reimbursement isn’t as easy as just handing over the money or taking one simple step on a tax form. The IRS requires that the amounts paid must be substantiated by the employee according to the requirements of the Internal Revenue Code.
Why does your business need an accountable expense plan?
Think of this blog as a helpful intro, but when in doubt, ask an accounting or tax professional for help.
How Do I Set Up Mileage Reimbursement?
Before you start reimbursing your employees for business expenses, you should first determine whether you have an accountable plan set up for the reimbursement arrangement. An accountable plan is a reimbursement or expense allowance arrangement.
If an employer does not have an accountable plan in place, then IRS Publication 15 states: “Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to the withholding and payment of income, social security, Medicare, and FUTA taxes.”
In order to have an accountable plan, the employer’s reimbursement or allowance arrangement must satisfy these three rules (explained further below):
- A business connection
- Returning excess amounts
Related Article: Business Expenses 101: Proper Substantiation of Business Expenses
What Counts as a Valid Travel Expenses for Business?
Once you establish an accountable plan, it’s important to ensure business expenses for mileage reimbursement are valid. If an employer wants to reimburse employees for mileage expenses they’ve racked up on the road for work, it has to be an expense that the business can deduct on income tax returns.
According to the IRS, to be deductible, a business expense must be both "ordinary” and “necessary":
- Ordinary means it’s commonly accepted in your business or trade
- Necessary means it’s appropriate or helpful for your business or trade
Here are additional examples of expenses you might be able to deduct when you travel away from home for business purposes:
- Temporary job sites - You can deduct travel expenses paid or incurred in connection with a temporary work assignment away from home if it’s realistically expected to last (and does, in fact, last) for one year or less.
- Customer visits - Driving to meet a customer off-site is likely deductible.
- Errands and supplies - Driving to pick up supplies for your office is an often overlooked mileage deduction.
- Business meals and entertainment - Believe it or not, you may be able to deduct mileage for trips you or your employee take to meet clients for coffee, drinks, or dinner.
- Conventions - Travel expenses for conventions are deductible if your attendance benefits your trade or business. Note that special rules apply to conventions held outside the North American area.
- Airports - The miles you or your employees drive to and from the airport for business trips count as well.
- 58 cents per mile for business miles driven, up 3.5 cents from 2018
- 20 cents per mile driven for medical or moving purposes, up 2 cents from the 2018 rate
- 14 cents per mile driven in service of charitable organizations
Related Article: When to Pay Employees for Travel Time: A Quick Guide
What Are Standard Mileage Reimbursement Rates?
Each year, the IRS releases optional standard mileage rates for employees and self-employed individuals who use an automobile for work purposes — whether that be for business, charity, medical, or moving expenses. These deductible costs are calculated for cars, vans, pickups, and panel trucks.
Historical standard mileage reimbursement rates can be found here, and for 2019, the rates are as follows:
Say you drove 110 miles to reach a business conference for work. If your business expenses are substantiated, you would eligible for $63.80 (110 x .58) in mileage reimbursement.
All About the Savings
Even though mileage reimbursement is optional, overall it’s a smart business choice for you and helpful for your employees. Not only will you be able to deduct the expenses on your taxes, but your employees will also be grateful that they don’t have to shoulder all the costs of business travel — while still having the chance to rack up their frequent flyer miles. A true win-win.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.