The 2018 tax reform has placed new pressure on businesses to fully reimburse employees who use personal vehicles for work. The new tax code eliminates the federal deduction for unreimbursed business expenses until 2025. Now employees will look more than ever to their employers to fully cover their expenses.
In the past, some organizations have told their employees to just write off vehicle expenses. Others have paid a standard company car allowance or mileage rate year after year without checking to see whether employees’ expenses were fully being covered—because they knew employees could just fill out Form 2106 on their tax return and deduct their business mileage or their actual expenses.
But that time has passed. Every employee with business vehicle expenses will essentially take a pay cut when they file their 2018 taxes—unless their employer already fully reimburses their expenses.
It’s time to evaluate your car allowance or mileage reimbursement
If you own or manage a business that pays a car allowance or mileage reimbursement, you need to take the new tax landscape seriously. You need to re-evaluate the amount of your car allowance or mileage rate and ensure that no employee faces an income loss via increased taxes next year. Otherwise, as employees figure out that they’ve lost what amounts to a massive deduction for many of them, they will take measures to recoup that loss. These measures could include the following:
- Labor code complaints and lawsuits – Illinois and California labor laws require full reimbursement of employees; other states have similar laws to protect employee rights, and it’s likely that more states will pass protective measures now that employees can’t deduct mileage on Form 2106.
- Loss of productivity compared to costs – Employees who receive a flat allowance may drive less to save money. Those who receive a mileage rate may drive or report empty miles to add income.
- Increased attrition – Employees whose companies do not adjust to the new tax code will leave for employers who fully reimburse employee expenses.
Determining the right policy type and amount
Different companies have employees with different expense needs. Even within a company the expenses can vary greatly. You need a guide to help you figure out the right policies and mileage reimbursement rates for your organization and its employees.
We have created a detailed exploration of the ins and outs of car allowances and mileage reimbursements to help you navigate the new landscape. In this guide you’ll discover
- The full range of employee expenses an allowance or reimbursement should cover
- The methods companies can use to reimburse or compensate employees for business expenses
- Which method is best for your organization’s size
- Whether your allowance or reimbursement should be taxed
- How the IRS mileage rate works and whether it’s right for your company
- Ways to comply with strict labor laws like California Labor Code Section 2802(a) or the Illinois Wage Payment and Collection Act.
- The shortcomings of both traditional company car allowances and mileage reimbursements
- How to address these shortcomings effectively
- Further in-depth information about tax reform in 2018
With a complete understanding of these topics, you’ll be able to determine whether your current policy will withstand the new tax landscape. You’ll also be equipped to fit your allowance amount or mileage rate to the actual needs of your employees. This way you can retain good employees while also controlling costs.
Take the time to educate yourself now so that you can treat your employees equitably in the coming years.