A mileage reimbursement is not treated as taxable income if you follow the rules. What are the tax rules for mileage reimbursements? Here is your guide to keeping mileage reimbursements free of taxes.
Is a mileage reimbursement taxable income?
A mileage reimbursement is non-taxable when part of an accountable plan, as defined by IRS Publication 463. To avoid taxes, the mileage reimbursement cannot exceed the IRS business mileage rate ($0.67/mile for 2024). Drivers must also prove business use of mileage. This requires an IRS-approved mileage log or mileage tracking app.
The IRS has approved an alternate tax-free federal rate called fixed and variable rate (FAVR). We'll explore rules for mileage reimbursements first. Then we'll explore why many businesses prefer FAVR over the standard mileage rate.
What makes a mileage reimbursement tax exempt?
Internal Revenue Service Publication 463 defines the requirements for taxation of allowances for vehicles. If you follow these IRS rules, then your business mileage reimbursement is not taxed.
Accountable vehicle reimbursement plans
First, a tax-free reimbursement must be part of an accountable plan that demonstrates business use of all reimbursed mileage. This requires an up-to-date record of each business trip – date, destination, mileage.
In the past mileage logs were paper records or Excel spreadsheets, but now more people use mileage tracking apps designed to automate the process. Adopting an accurate, automated mileage capture system is important for tax-exempt mileage.
IRS mileage reimbursement rate 2024
Second, reimbursements must be equal to or less than the 2024 IRS business rate. Any amount over the equivalent of $0.67/mile is taxable income. Alternately, the employee may return any amount above the equivalent of the federal mileage rate to avoid taxes. An IRS mileage allowance plan uses this method to keep the car allowance payments non-taxable.
If the company pays the standard mileage rate, a FAVR rate, or a mileage allowance but does not properly track mileage, then payments are taxable.
What expenses does a mileage reimbursement cover?
The IRS business mileage rate is based on average costs of owning and operating a vehicle in the U.S. Each year the IRS calculates these costs based on the previous year and the forecast for the new year. Because these costs represent the averages across the country, they apply more to some drivers than others. Using a national average consequently can create problems for calculating mileage reimbursements.
A reimbursement for an employee vehicle should cover the business percentage of the following expenses:
Vehicle Ownership (Fixed Costs)
- Auto insurance
- Depreciation (higher if employer requires a newer car)
- Taxes, license, registration
Vehicle Operation (Variable Costs)
- Fuel
- Oil
- Maintenance
- Tires
Some of these costs are higher in certain parts of the country than others. (California's gas prices and Louisiana's auto insurance premiums, for example.) This difference is why some businesses pay a different mileage reimbursement rate in one region than another.
What business mileage reimbursement rates are tax-free?
IRS Publication 463 identifies two federal driving reimbursement rates that qualify for tax-exempt status.
- The standard business rate is capped at $.67/mile for 2024.
- A fixed and variable rate (FAVR).
The federal allowance for mileage always sets certain thresholds under which payments must fit. All tax-free mileage reimbursements and car allowances must remain under the equivalent of the standard business rate. Any amount above the equivalent must be returned, or it will be taxed.
A FAVR allowance must calculate rates using a standard vehicle that remains under the maximum value for that year. For 2024, that maximum value is $60,000.
IRS rate vs. FAVR - which is better?
Paying a standard rate like the IRS mileage rate may be tax-free but not problem-free. Drivers do not incur costs at the same rate. Some live in more expensive areas, and some drive more than others.
A FAVR plan solves this problem because all rates derive from localized costs applied to a standard vehicle. Because of this, the standard mileage rate for businesses provides less accurate payments. A FAVR plan also tends to be more cost-effective.
IRS standard mileage rate shortcomings
You must drive several miles to cover fixed ownership costs with a standard mileage reimbursement. At that amount, mileage-based costs like fuel and maintenance start being reimbursed.
At some point, the mileage multiplied by the mileage rate will exactly equal the combined set of fixed and variable costs for that month. Once the driver reaches that magic number, each mile driven becomes extra income (tax-free income, no less!). But if the driver never reaches that number, some costs remain unreimbursed.
Can you deduct mileage on taxes?
Before 2018, employees could deduct unreimbursed expenses on their tax returns. However, the Tax Cuts and Jobs Act (2017) suspended miscellaneous deductions through tax year 2026.
1099 workers, on the other hand, may deduct mileage on their taxes because they do not qualify as employees but as self-employed workers. In summary, employees cannot take a tax deduction for mileage, but 1099 contractors can.
Problems with claiming mileage on taxes
IRS tax deduction rules pose an unfair challenge for employees. A high-mileage driver may be over-reimbursed, while a low-mileage driver may be under-reimbursed. What if that second person drives fewer miles because they work in an urban area, which is likely expensive? What if the first person drives a lot because they cover a large, less expensive territory?
Yet the first person cannot write off the unreimbursed portion of vehicle expenses. Only 1099 workers can claim mileage on taxes. This unfair situation offers a strong reason to choose FAVR over the IRS rate for business mileage compensation.
Mileage reimbursement problems and solutions in 2024
Standard mileage reimbursements do not work for all employees. Employees who cover small territories, especially in expensive areas, may not drive enough miles to cover vehicle expenses.
Example: An employee who drives 500 miles per month for work will receive $335. Will this amount cover the business portion of gas, insurance, depreciation, and maintenance? A different approach is needed – one that addresses ownership and operation costs and reimburses employees at different rates based on location.
IRS mileage reimbursement alternatives (non-taxable)
The IRS has offered solutions to mileage reimbursement problems while keeping a tax-free plan. One is a mileage or car allowance paired with mileage tracking to keep the plan accountable. This approach has some flaws, which you can read about here.
The better option is fixed and variable rate, or FAVR, described briefly above. To learn more about this IRS-recommended plan, select the button below.
