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IRS Standard Rates
Each year, the Internal Revenue Service sets a standard rate for business use of vehicles. For example, in 2015 the rate was 57.5 cents per mile. The reimbursement rate is used to figure the tax write-off when work-related travel is not reimbursed. The standard business rate covers the cost of operating an average vehicle, including gasoline, maintenance and repairs, insurance and depreciation.
Non-Business Mileage Write-Offs
Some reimbursements are for non-business driving, but still qualify for a tax break. Travel for moving or medical reasons could be deducted or reimbursed at 23 cents per mile as of 2015. The rate for driving when performing charitable activities is set by law at 14 cents per mile.
HR Hero says three criteria must be met for mileage reimbursement to qualify as a business expense. First, reimbursement may be paid only for travel directly related to work. Commuting between your home and normal workplace isn’t qualified travel. Second, employees must document work-related driving. Finally, an employee must return any excess reimbursement amounts paid. Employers do not include qualified mileage reimbursements as income, so it's entirely tax–free to the employee. An employer
may write the amount off as a business expense.
Recordkeeping for Reimbursement
Employees typically keep a mileage log to document their work-related driving. It starts with the first day of the year the car is used for business and ends with the odometer reading on the last day. Each entry must state the date, the business reason for the mileage and where you go. The starting and ending odometer readings must be recorded. Employers use this information to compute mileage reimbursements by multiplying miles driven by the IRS standard rate.
Actual Expenses Option
Employers generally don’t use actual vehicle expenses because of the recordkeeping requirements. However, employees can use actual expenses if they exceed the reimbursement amount. To use actual costs, an employee must keep a mileage log and records of insurance payments, gasoline purchases, repairs and all other vehicle expenses. Once that employee does use actual expenses, he can't use the standard rate again if accelerated depreciation is claimed. Only expenses in proportion to the business use of the vehicle may be claimed. For instance, if 25 percent of the miles driven in a year are work-related, 25 percent of actual vehicle expenses can be written off.