Why it is better to manage your organizations miles rather than to lower the rate reimbursed. We speak with many organizations that pay a much lower rate than the IRS maximum, stating that their employees can deduct the mileage.
How easy is it for employees to deduct underpaid mileage?
The big question is do your employees itemize. Typically, you itemize if your total deductions exceed the standard deduction; see chart below of standard deductions.
|Married filing jointly||
|Head of household||
|Married filing separately||
Who itemizes? Well it turns out only 33% of taxpayers itemize based on Congressional Research data ( http://www.fas.org/sgp/crs/misc/R43012.pdf )
Now that we realize that the majority of taxpayers do not itemize and therefore cannot take deductions for underpayment of mileage. Let’s focus on those that do itemize and see the benefits of the deductions.
Rule of non-reimbursed business deductions – business deductions are only deductible over 2% of an Adjusted Gross Income (AGI). What does this mean? If a taxpayer has $50,000 of AGI then the first $1,000 (2%) of business expenses cannot be deducted.
Scenario – Employer reimburses 40 cents per mile and employee drives 10,000 miles. The employee can deduct the difference between the 40 cents and the 56 ½ cents ~ 16 ½ cents x 10,000 miles = $1,650 deduction. If the employee has an AGI of $50,000 than they can deduct $650.00, therefore the employee has an effective reimbursement rate of 46 ½ cents per mile. Conversely if the employee drives 6,000 miles or less than they cannot take any deduction.
Bottom Line – Don’t assume your employees can deduct their mileage difference between the IRS rate and your actual reimbursed rate. Our clients have found that managing the miles is the most effective method of lowering mileage cost.