If your company provides a car allowance and has added either a fuel card or fuel reimbursement, it's going to cost you if you don't track mileage properly. Here’s what you need to know.
A common complaint companies hear about their car allowance is that it doesn’t fully cover the costs of business travel. When mobile employees are paid a car allowance they are burdened by the taxes from being paid compensation as a reimbursement. Many companies hear this complaint and listen. But the solution isn’t as simple as increasing the car allowance across the board. Different employees cover different sized territories, and some territories entail higher gas prices, insurance and maintenance costs, or taxes and fees.
Quite a few companies will settle on a fuel card or fuel reimbursement program as the solution. On the surface, the fuel card will check all of the boxes to cover employees’ costs:
However, while providing a car allowance and fuel reimbursement or car allowance and fuel card is simple and straightforward, it creates a new set of challenges that require the use of an IRS-compliant mileage log.
- Your company is required to maintain proper records.
You are the custodian of record and providing the gas card as a benefit. You must be able to substantiate that all fuel expenditures went toward business use, not personal use. It is easy for an employee to buy gas with the company card and then combine a business trip with a personal errand. However, you, not that employee, are accountable to the IRS for the proper use of the fuel card, which means that you must require employees to use an IRS-compliant mileage log.
- An IRS-compliant mileage log must meet specific criteria.
A mileage log needs to contain certain information to be considered IRS compliant:
- Date of business travel
- Business purpose
- Number of miles traveled for business
- Locations visited
- Annual odometer readings
- A mileage log can seem laborious, leading to neglect.
Many companies either overlook or do not think that a mileage log is requirement. It could be that the phrase “mileage log” conjures memories of either paper logs or a laborious task that takes employees away from value-driven activities. However, a mileage log is vital because it defines and substantiates business use of the gas card and differentiates a business expense from a perk. A business expense can be written off while a perk has to be taxed. It’s just that simple.
- It can be tempting but costly to put off record-keeping.
Because keeping a mileage log can feel like an administrative task that has nothing to do with an employee’s actual job, many organizations allow employees to put it off until the end of the quarter or even the end of the year. However, this can result in errors that confuse business use and personal use. The best way to accurately substantiate business use for mileage is to keep contemporaneous records. Contemporaneous means that your organization maintains mileage records that are created right after the trip occurred or each day employees drive for business. This is now possible with the latest advancements in mileage tracking.
- Taking short cuts can also impact organizational costs.
Many organizations take short cuts when it comes to mileage, such as relying on daily activities, employees’ calendars, sales sheets, or call logs to estimate mileage in the event of an audit. This reduces the time and work on the front end, but presents challenges when employees leave the company or time goes by. In the event of an IRS audit, these short cuts could prove costly. Timely, accurate records are keys to a successful audit. Records that cannot quickly be produced could be a red flag for an auditor.
To support your fuel reimbursement or gas card program, the best approach is to make timely mileage reporting mandatory, not optional or something you only address when an IRS audit occurs.
Best practice: Use integrated, automated mileage tracking.
With the rapid rise of mobile apps, it is now possible to embed a mileage log in your employees’ smartphones. As long as precautions are taken to protect the privacy of the driver, a GPS-based mileage capture app can ensure accurate, timely record-keeping and deliver maximum employee compliance. The best mileage logs also integrate with existing CRM software and employee reimbursement systems.
Without contemporaneous mileage tracking, you will have trouble substantiating business use of the fuel card or reimbursed fuel. Even worse, it will be easier for employees to purchase gas using the company card or get reimbursed for gas they used for personal trips.
Learn more here about the innovative tools for mileage capture offered by mBurse. A gas card or fuel reimbursement program without mileage tracking is like a company credit card without a paper trail.