It's tax season again and time to review the IRS rules regarding business mileage deductions. The Tax Cuts and Jobs Act (2017) made major changes to the rules around miscellaneous tax deductions that continue to affect whether you can deduct your mileage in tax years 2018-2025.
The answer is, it depends on whether you incurred the mileage as an employee or as an independent contractor or business owner. For the tax years 2018-2025, employees cannot deduct business mileage. However, self-employed tax filers may still deduct business mileage.
If you drove a personal vehicle on behalf of an employer during the year 2021, you cannot deduct that mileage on this year's tax return. If you accrued business mileage as a self-employed contractor, you can still deduct that mileage, at the 2021 rate of $.56/mile. (Here's our take on the 2022 IRS mileage rate of $.585/mile.)
If you own or manage a business that has employees driving personal vehicles as part of their jobs, it is important to note this distinction around tax deductions because it can have a major impact on those employees.
Employees who drive a lot and relied on the business mileage deduction in previous years have taken a hit financially and may expect the company to fill in the gaps through their 2022 car allowance or mileage reimbursement.
Again, in the past, employees could deduct unreimbursed business expenses, but this is now the fourth tax year they have not been able to. If your company paid a car allowance that was subject to tax withholding, then that car allowance was not considered a reimbursement by IRS standards. As a result, under the old tax code, anyone receiving that car allowance could claim a deduction for either the business mileage at the IRS standard rate or the actual amount of vehicle expenses incurred for the job.
Most people just added up the mileage, multiplied it by the IRS business mileage rate, and deducted that amount on their tax return. If they drove a lot, then they got a huge deduction. Those times are no more, and both employees and employers must adjust to the new reality.
On the other hand, drivers who received a mileage reimbursement using the IRS mileage rate or a lesser rate were not able to deduct business mileage, since the deduction was only for unreimbursed business expenses. They could, however, deduct any vehicle expenses above their reimbursement amount. That's no longer the case for employees until 2026.
If you are an employer or manager of employees who previously relied on the unreimbursed business expense deduction to make their vehicle reimbursement "whole," then your organization needs to take action right away. It's a matter of fairness to make sure all drivers receive a fair vehicle reimbursement for their work on behalf of the company, whether they are sales reps, delivery drivers, account managers, or merchandisers.
It is also crucial to adhere to state laws that require full reimbursement of employees for vehicle expenses. California, Massachusetts, and Illinois all have labor codes that fully indemnify employees from those expenses. Several other states, including Rhode Island, the Dakotas, and a few others, have employee-friendly laws that essentially require the same. Employees in these states can take the company to court in order to recoup unreimbursed vehicle expenses.
If you are an employee who is feeling the effects of losing the tax write off for unreimbursed business expenses such as mileage, consider opening up a conversation with your employer about possible changes that might be needed to strengthen the current vehicle reimbursement plan, whether it's a car allowance, a mileage rate, or a gas reimbursement. Make sure you know your rights if your state requires full reimbursement of expenses.
With the loss of this popular tax deduction, there are a number of ways an organization with mobile workers can adjust and keep everyone happy.
Eliminating the 30-40% of an employee's car allowance that goes to taxes (plus the company's share of payroll taxes) can go a long way toward boosting employee benefits while not costing the company anything extra. Adding mileage substantiation (also known as a "mileage allowance") or switching to a FAVR car allowance ("fixed and variable rate") are two viable options. Switching to the IRS mileage rate can also help, but it tends to under-reimburse low-mileage drivers and over-reimburse high-mileage drivers.
Consider also exploring a convenient, hands-free mileage tracking app, like mLog. This kind of tool will decrease administrative headaches.
Take some time to add up your vehicle expenses, including gas, maintenance, oil, depreciation, insurance, registration, and other fees. Compare it with the amount you currently receive. If it falls short, have a conversation with your employer about either boosting the current reimbursement or switching to another plan.
Switching from a taxable plan to a non-taxable plan often pays for itself and provides a win-win situation. Cutting Uncle Sam out of the process entirely leaves more funds for the company and the employees to share, keeping the vehicle reimbursement more equitable and sufficient than before.
Contact mBurse today about our reimbursement rate development program or our non-taxable reimbursement plans. Or use the calculator below to find out how much your company could save by switching to a non-taxable plan.