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 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 can avoid taxation.
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. This depends somewhat on what type of fuel program you operate.
Ways to pay for employees' fuel usage
There are several methods to pay for employees’ fuel:
- 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 your business needs a fuel use policy
If your business pays for employees’ fuel it is crucial to place boundaries 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 clearly define business use vs. personal use and to place reasonable limits on total fuel use.
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 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.
[Read more: Fuel Card vs. FAVR - Which Is Better?]
How to properly tax a fuel card
A bigger problem than expense management is the taxation of a fuel card. The key issue is substantiation of business use. If you can prove the gas was used for business, then it’s non-taxable. If you can't, it's taxable.
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 all 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. 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?
The most common way to prove business use is through tracking mileage for business trips. Substantiating business use of fuel can come in many forms:
- Time and attendance records
- Calendar events
- CRM records
- Mileage logs
Mileage logs are the 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. Today's mobile apps that track mileage practically automate the process.
For a fuel reimbursement to be a reimbursement, you need either a mileage log or another detailed form of proof. If you can’t substantiate, then it’s not a reimbursement and instead considered a fringe benefit – or taxable income.
The tax benefits of a business mileage app
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 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. By instead 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 app, you 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.
