After tax withholding, many car allowances do not cover employees’ costs. So employers may decide to add a fuel card to help out. However, the IRS imposes strict rules governing fuel cards and fuel reimbursements.
Quick Answer: Should Company Fuel Cards Be Taxed?
Company fuel cards may be taxable when employees can use them for personal fuel or when the employer cannot substantiate business use. Fuel paid for documented business driving can generally be treated as a business reimbursement, but personal or unsupported fuel use may need to be charged back or treated as taxable income.
Employers should use a clear fuel card policy, mileage logs, receipt review, business-purpose documentation, and approval controls to separate business fuel from personal fuel.
When Are Company Fuel Cards Taxable?
Company fuel cards are not automatically taxable, but they can create taxable income if the employer cannot document that the fuel was used for business purposes. The key issue is substantiation.
If the fuel card is used only for approved business driving and the company has records showing business use, the fuel may generally be treated as a business reimbursement. If the fuel card is used for personal driving or unsupported fuel purchases, that amount may need to be charged back to the employee or treated as taxable income.
A receipt alone usually proves that fuel was purchased. It does not always prove the fuel was used for business driving.
Ways Employers Pay for Employee Fuel
Employers commonly cover fuel in several ways:
- Company fuel card: Employees use a dedicated card for fuel purchases.
- Company credit card: Employees use a company card that may allow fuel and other business purchases.
- Fuel receipt reimbursement: Employees submit fuel receipts for review and reimbursement.
- Mileage reimbursement: Employees are reimbursed with a cents-per-mile rate that usually includes fuel as part of the rate.
Regardless of the method, employers should define when fuel is reimbursable, what documentation is required, and how personal use is handled.
Why Employers Need a Fuel Card Policy
A fuel card policy helps define when employees can use company funds for fuel, which trips qualify as business use, and how personal use is handled. Without a clear policy, fuel cards can create tax risk, cost-control issues, and disputes over business vs. personal driving.
A strong policy should explain who is eligible for a fuel card, where and when it can be used, what records are required, how mileage must be documented, and what happens if the card is used for personal fuel.
Fuel card policy 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 fuel card costs monthly to ensure a reasonable amount of fuel is being used and that rules are being followed. Many organizations will only skim the costs and monitor those employees with high fuel costs.
[Read more: Fuel Card vs. FAVR - Which Is Better?]
How to Properly Handle Fuel Card Taxation
Fuel card taxation depends on whether the employer can prove business use. If the company can document that fuel was used for business driving, the fuel expense may generally be treated as a business reimbursement. If the company cannot document business use, the fuel card benefit may need to be treated as taxable income.
When a fuel card is used for both business and personal fuel, employers should have a process for identifying the personal portion. That may involve an employee chargeback, payroll adjustment, or another documented method based on actual cost, percentage of use, or mileage records.
Employers should avoid assuming that every fuel receipt is automatically a business expense. Receipts should be paired with trip records or another reliable method for proving business use.
How Do Employers Prove Business Use of Fuel?
Employers can prove business use by connecting fuel purchases to business driving records. Mileage logs are often the easiest way to do this because they show the date, destination, business purpose, and miles driven.
Other records can also help support business use, including:
- Time and attendance records
- Calendar events
- CRM activity
- Route or dispatch records
- Mileage logs
A fuel receipt proves that fuel was purchased. It does not, by itself, prove that the fuel was used for business driving.
The tax benefits of a business mileage app
As the custodian of record, the company’s responsible for maintaining records demonstrating business use. So you need a system that lets employees report not only their total mileage each month but also their trip details.
Some companies opt for a simple Excel spreadsheet with columns for all the required information. Recording this info, however, can be tedious. Instead, by providing a GPS mileage app, the employer can save employees’ precious time while still substantiating business fuel use. By pairing your fuel card with a mileage app, you keep the benefit non-taxable while also holding employees accountable for not abusing the card.
FAQs About Fuel Cards and Taxes
Are company fuel cards taxable?
Company fuel cards may be taxable when employees use them for personal fuel or when the employer cannot document business use. Fuel used for approved business driving may generally be treated as a business reimbursement when properly substantiated.
Is a fuel receipt enough to make fuel non-taxable?
No. A fuel receipt shows that fuel was purchased, but it does not prove the fuel was used for business driving. Employers should pair receipts with mileage logs, trip records, or other business-use documentation.
How can employers separate business fuel from personal fuel?
Employers can separate business and personal fuel with mileage logs, trip records, fuel card transaction reviews, chargebacks, payroll adjustments, or a policy that limits when and where fuel cards can be used.
Can employees use a company fuel card for personal driving?
Employers should avoid allowing unrestricted personal use. If personal fuel is allowed, the personal portion should be identified and either repaid by the employee or treated properly for tax purposes.
Is mileage reimbursement better than a fuel card?
Mileage reimbursement may be simpler when employees use personal vehicles because the cents-per-mile rate usually includes fuel. Employers should avoid paying both mileage and fuel for the same business driving unless the policy clearly prevents duplicate reimbursement.
Can FAVR replace a fuel card?
FAVR may reduce the need for a fuel card by reimbursing fixed and variable vehicle costs separately. Variable costs can include fuel, maintenance, tires, and mileage-based operating expenses. FAVR can support tax-free reimbursement when IRS requirements are met and business mileage is properly documented.
Not sure whether your fuel card is creating tax risk or duplicate reimbursement? mBurse can help you compare fuel cards, mileage reimbursement, mileage tracking, and FAVR options to identify a cleaner, more accurate vehicle reimbursement strategy.
