Many organizations pay a car allowance only to realize that after taxes the car allowance doesn’t cover employees’ costs. So they add paying for employees’ fuel. But paying for fuel is not as easy as providing a receipt. The IRS places strict rules on how to govern fuel cards and fuel reimbursements.
Should fuel cards be taxed?
The short answer is – Yes. The way many companies administer their gas card or fuel reimbursement programs, they absolutely should be taxing these expenditures. But under certain conditions you do not have to tax the fuel.
Ideally, by paying a car allowance amount optimized for your organization's employees, you avoid dealing with a fuel card in the first place. The trick is to create a car allowance that does not leave a gap between the monthly payments and employees' vehicle expenses, which usually means adopting a tax-free plan.
If your organization currently pays directly for employees' fuel and is not ready to make any changes to its car allowance policy, it is important to know the IRS rules, and when to tax versus when not to tax. First, let's examine the ways you can pay for employees’ fuel and how to properly administer the program.
Ways to pay for employees' fuel usage
When considering paying for employees’ fuel there are several ways to do it:
- Provide a dedicated fuel card.
- Provide a company credit card allowing for fuel purchases.
- Reimburse the employee for fuel receipts.
With each of these, any fuel expense that cannot be substantiated as business use will be treated as taxable income for the employee. That’s why it’s important to know the IRS rules and to institute clear policies for fuel cards and reimbursements.
Why you need a fuel use policy
If you are paying for your employees’ fuel you MUST place structure around how the card is used. You need a vehicle reimbursement policy to specify when and how an employee uses company funds to pay for gas. This is vital not only for tax purposes but also to help control costs and eliminate the gray areas for fuel card abuse.
The key issue is to determine business vs. personal use and to place reasonable limits around total fuel use.
Fuel card best practices:
- Limit fuel card use to certain days of the week.
- Cap how much fuel can be pumped at any given time.
- Provide a company mileage log to measure business vs. personal use.
Once the fuel card or fuel reimbursement policy is set you should evaluate the fuel card costs on a monthly basis to make sure a reasonable amount of fuel is being used and rules are being followed. Many organizations will only skim the costs and monitor those employees with high fuel costs.
How to properly tax a fuel card
A bigger problem than expense management is the proper taxation a fuel card. The key issue is substantiation of business use. If you can prove that the gas was used for business, then it’s non-taxable. If you can’t, then it’s taxed.
When a fuel card can be used for both business and personal fuel, you need to charge the employee back for any personal fuel. Otherwise that use of the card becomes taxable income. The chargeback can come in several different forms with taxation based on:
- Percentage of use
- Actual cost
- Cents per mile
One common misconception is that a receipt is all that is required to make this a non-taxable event. The reality is much different.
A receipt for a business expense is important – it is proof that the expense occurred. The receipt itself, however, does not substantiate the business use. For that, you need more detailed information about the trip.
How do you prove business use of an expense?
As with a fuel card, a fuel reimbursement requires proof of business use. If you can’t substantiate, then it’s not a reimbursement and instead considered a fringe benefit – or taxable income.
Substantiating business use of fuel can come in many forms:
- Time and attendance records
- Calendar events
- CRM records
- Mileage logs
Mileage logs are the most common and easiest way to substantiate business records associated with expenses. By recording the date, purpose, destination, and mileage of a trip (in a timely manner), you provide substantiation.
The tax benefits of a mileage log
As the custodian of record, it is the company’s responsibility to keep records proving business use. So you need a system by which employees can record not only their total mileage each month but also their trip details – and you must make sure the company maintains these records.
This is where an IRS-compliant mileage log proves invaluable. Some companies opt for a simple Excel spreadsheet with columns for all the required information. Recording this info can get tedious, so increasing numbers of organizations are now using real-time mileage tracking.
By providing a GPS mileage app, the employer can save employees’ precious time while still substantiating business use of fuel. By pairing your fuel card with a mileage tracking app or other IRS-compliant mileage log, you can keep the benefit non-taxable while also holding employees accountable to not abuse the card.
If you would like to learn more about eliminating all tax waste – not just from your fuel card but also from your car allowance – mBurse offers a range of solutions, from mileage logs to a la carte services to full program administration.