When is Mileage Taxable? It’s Complicated.

Whether it be to take a meeting, travel to a client, or pick up office supplies, driving plays an essential role in the day to day lives of many employees. Accordingly, when these employees are using their own vehicles, businesses need to reimburse them for the driving expenses they incur; in some states (Illinois, California, Massachusetts, Montana, Pennsylvania, New York, Iowa and the District of Columbia) it’s even the law. This begs the question, is mileage taxable? 

Ideally, there would be a simple answer, but we know all too well that nothing related to taxes is ever simple, and mileage is no exception. The answer to this question is that it depends — primarily on two factors, each with its own set of specifications.

So, Is Mileage Taxable? It Depends On These Factors:

The Standard Mileage Rate

A huge factor to consider when determining if mileage reimbursement is taxable is the standard mileage rate, the largest amount per mile you can reimburse employees and still receive a full deduction. While the standard mileage rate isn’t the only method used to figure out mileage deductions, it is the most popular; the standard mileage rate factors in the costs associated with owning and operating a vehicle, such as gas, maintenance and insurance, so it calls for less documentation than the other option, calculating actual expenses.

The standard mileage rate changes every year, but for 2021, it stands at 56 cents per mile. You don’t necessarily have to reimburse employees at that rate, but paying a different amount may impact how much you can deduct; while any reimbursements less than the standard mileage rate will still be deductible, any reimbursements in excess of 56 cents per mile will count as taxable income for employees.

Accountable Plans

The next piece to consider when determining if your company’s mileage is taxable is whether or not you’re following an accountable plan. In short, following an accountable plan means meeting the IRS guidelines for expense reimbursement, allowing that reimbursement to be tax-deductible. If you don’t meet these requirements, you’re following a nonaccountable plan, and any reimbursements made will be taxable. 

For an expense to be accountable, it needs to meet three conditions: 

The Expenses Must Be Business-Related

Any expense in an accountable plan, first and foremost, needs to be for a legitimate business purpose. This includes driving to meet clients, picking up inventory, trips to temporary workplaces, or any other travel expense the IRS deems “ordinary and necessary.” The IRS defines an ordinary expense as one that is “common and accepted,” and a necessary expense as one that is “helpful and appropriate,” but not necessarily indispensable. This, unfortunately, does not include home commutes, coffee runs, or personal errands. 

However, there are some situations where the lines get blurred between a work trip and a personal one. In those cases, the trip can still be partially deductible if the employer and employee split the costs appropriately. For instance, if an employee drives to an out-of-town meeting then decides to catch a movie afterward, the travel to and from the meeting would be deductible, but the travel to and from the theater would not. 

There Must Be Good Recordkeeping And Accounting

The IRS is a stickler for the rules, and they won’t just take your word that you’ve been following them; to reap the benefits of an accountable plan, you have to prove that you qualify for one. This means that employees need to keep accurate mileage logs recording their travel expenses, which is easiest to achieve when they are updated frequently. Acceptable mileage logs need to be documented through an expense report, an app (such as CompanyMileage) or another form of written document, and must include the following information: the purpose of the trip, start and end locations, the date, and odometer readings. 

Excess Reimbursements Must Be Returned Within A Reasonable Timeframe

Finally, in order for an expense to be part of an accountable plan, any excess reimbursements need to be repaid to employers within a reasonable period of time. By IRS standards, this timeframe is typically capped at 120 days.   

Is Mileage Taxable With CompanyMileage? 

So, is mileage taxable? In general, it depends, but that’s not the case with CompanyMileage. Our reports include everything you need to receive a deduction: the start and end locations, the time and date, mileage and any additional notes the drivers choose to leave. All employees have to do is check-in at each location, submit their trips and the system will send it over to the appropriate people for reimbursement. This not only reduces the burden placed on employees, but ensures that documentation is completed in a timely manner. And instead of relying on odometer readings, we look at the actual distance between the start and end of a trip, guaranteeing that records are always accurate.

Our clients can rest assured that their mileage expenses will be easy to manage, transparent and tax-deductible. Schedule a demo of CompanyMileage today to learn more!