Many organizations pay a mileage rate to reimburse workers for using a personal vehicle. But what does mileage reimbursement cover, and how do you know it accounts for all reimbursable vehicle expenses? Some expenses like auto insurance and depreciation can be difficult to reimburse properly with a mileage rate.
Quick Answer: Does Mileage Reimbursement Include Auto Insurance and Depreciation?
Yes. Mileage reimbursement can include the business-use portion of auto insurance and depreciation when those costs are built into the reimbursement rate. The IRS business mileage rate is designed to account for both operating costs, such as fuel and maintenance, and ownership costs, such as insurance and depreciation.
However, a single cents-per-mile rate may not fully cover every employee’s insurance and depreciation costs. Lower-mileage drivers, employees in higher-cost regions, or employees with higher insurance premiums may be under-reimbursed because fixed costs do not rise directly with mileage.
A mileage reimbursement should cover all reasonable costs associated with using a vehicle for work. When the IRS calculates its standard business rate, a range of costs are taken into account. These costs include fuel, oil changes, maintenance, auto insurance, and depreciation.
A mileage rate is well suited to cover expenses that increase with mileage. A cents-per-mile rate increases its payout the more you drive. Expenses that increase as mileage increases include:
Expenses that remain relatively separate from mileage are harder to reimburse at a single cents-per-mile rate. Auto insurance and depreciation are examples of fixed vehicle costs because they do not rise in direct proportion to business miles driven.
The IRS mileage rate is designed to account for these costs, but the rate is based on broad national assumptions. For 2026, the IRS business mileage rate is 72.5 cents per mile for business miles driven January 1 through June 30 and 76 cents per mile for business miles driven July 1 through December 31.
Those rates can simplify reimbursement, but they may not precisely match each employee’s insurance costs, depreciation, mileage level, or location.
Mileage reimbursement is paid only when employees report approved business miles. That works well for variable costs that increase with mileage, such as fuel, maintenance, and tires. It is more complicated for fixed costs.
Auto insurance, registration, taxes, and some depreciation costs exist whether an employee drives many business miles or only a few. Lower-mileage employees may not drive enough business miles to recover the business-use portion of those fixed costs through a cents-per-mile rate.
Insurance and depreciation are considered fixed costs because they stay relatively stable over a period of time. An employee generally pays for auto insurance whether they drive 500 or 2,500 business miles in a month.
The more business miles an employee drives, the more opportunities they have to recover those fixed costs through a mileage reimbursement. A lower-mileage employee may receive less total reimbursement, even though the employee still carries insurance, registration, depreciation, and other ownership costs.
Two employees can have very different reimbursement outcomes even if they work for the same company. A lower-mileage driver may be under-reimbursed, while a higher-mileage driver may recover fixed costs more quickly.
For example, if Driver A travels 500 business miles per month and Driver B travels 2,500 business miles per month, both employees may still have similar insurance, registration, and depreciation costs. But Driver B receives much more reimbursement because the payment is tied entirely to miles driven.
That does not mean a mileage rate is wrong. It means employers should review whether one cents-per-mile rate is accurately covering both fixed and variable vehicle costs across different mileage levels.
Low-mileage workers often end up under-reimbursed. Mid-mileage workers who live in expensive regions are also at risk for under-reimbursement if you use a mileage rate. They may simply not drive enough to earn a reimbursement sufficient to cover insurance and depreciation, along with their other vehicle costs. In states that require full reimbursement of expenses, that could create legal problems.
A better approach is to pay a fixed rate for fixed costs and a mileage rate for variable costs. This fixed monthly sum covers depreciation, insurance, taxes, and registration. Then, a lower mileage reimbursement rate covers expenses directly tied to business mileage. This way, whether an employee makes few or many trips, their reimbursement will always match their expenses.
A fixed-and-variable rate reimbursement plan, or FAVR, separates vehicle costs into two parts. The fixed portion can account for ownership costs such as insurance, depreciation, registration, and taxes. The variable portion can account for mileage-based costs such as fuel, maintenance, tires, and oil.
Because FAVR uses mileage, location, and standard vehicle cost assumptions, it may provide a more accurate reimbursement structure than one national cents-per-mile rate. FAVR can also support tax-free reimbursement when IRS requirements are met, and business mileage is properly documented.
Not sure whether your mileage reimbursement is fully covering insurance, depreciation, and other vehicle costs? mBurse can help you compare your current mileage rate against FAVR and other vehicle reimbursement options to identify where employees may be overpaid, underpaid, or exposed to unnecessary tax waste.
Yes. Mileage reimbursement can include the business-use portion of auto insurance when insurance costs are built into the reimbursement rate. However, a single cents-per-mile rate may not fully reflect each employee’s actual insurance premium, location, coverage level, or business-use needs.
Yes. Mileage reimbursement can include depreciation when depreciation is part of the reimbursement rate. Depreciation is considered a vehicle ownership cost because the vehicle loses value over time, even if the employee does not drive many business miles.
Mileage reimbursement is usually tied to approved business miles. That can work well for variable costs like fuel, maintenance, and tires, but insurance and depreciation are fixed costs that do not rise directly with mileage. Lower-mileage employees may not drive enough business miles to recover the business-use portion of those fixed costs.
Yes. Auto insurance and depreciation are generally fixed vehicle costs because they remain relatively stable over time. An employee may pay insurance premiums and still experience depreciation, whether they drive 500 or 2,500 business miles in a month.
It can. In states with employee expense reimbursement requirements, under-reimbursement may create compliance risk if necessary business vehicle expenses are not adequately covered. Employers should review whether their mileage rate fairly accounts for fixed and variable vehicle costs.
FAVR may be a better fit when employees have different mileage levels, locations, insurance costs, or vehicle-cost profiles. A FAVR program separates fixed costs, such as insurance and depreciation, from variable costs, such as fuel, maintenance, and tires. When IRS requirements are met and business mileage is properly documented, FAVR can support tax-free reimbursement.