If your company uses the IRS business mileage rate to reimburse employees, you are using the wrong tool for the task. This leaves your company exposed to uncontrollable costs and unnecessary risks. Similarly, if your company is considering a change to the IRS rate, there are some risks you should evaluate before making the change.
The IRS, business mileage, and taxes - 3 key facts
Many people do not know that:
- The IRS mileage rate is a tax deduction tool for individual taxpayers—
not a business reimbursement tool—and will over-reimburse high mileage travelers and under-reimburse low mileage travelers.
- If you employ low mileage travelers in a state with an indemnification labor code, then you are potentially exposed to labor code violations and lawsuits due to under-reimbursed business mileage.
- When you pay the IRS mileage rate, your mileage log will largely determine your costs.
The IRS mileage rate was designed to calculate tax deductions, not business reimbursements.
The IRS standard mileage rate, or government rate, is published each year by the IRS as a cents-per-mile guide for individual tax deductions. This mileage rate was designed to help taxpayers calculate and deduct un-reimbursed business vehicle expenses rather than catalog and write off actual expenses. In other words, an individual tax payer could use the government rate to avoid tracking and claiming receipts and instead use a standard rate to calculate the deduction, saving a lot of time.
While not everyone can claim business mileage as a tax deduction during the tax years 2018 - 2025, that doesn't change the fact that it was designed for this purpose, and not for vehicle reimbursements.
The IRS derives this mileage rate from the average cost of owning and operating a motor vehicle across the entire United States over the previous year. Depending on where an employee lives and works, what type of vehicle the employee drives, and how many miles the employee drives, that employee could experience costs well above or well below the average.
Many organizations will use the IRS government rate because it is easy to calculate business mileage, multiply it by the rate, and deliver a tax-free reimbursement. In addition, employers often lack the methodology to establish a more accurate rate for their particular employees. But in doing so, they either expose employee income to company expenses, or expose the company to additional costs beyond what the employees actually need.
The IRS business mileage rate can bring labor code violations—and lawsuits.
If you have employees in states with laws that govern reimbursements, you could be exposed to potential lawsuits. The IRS rate has been universally accepted as the “standard” for reimbursements in states where you are required to indemnify employees for vehicle-related business expenses. For the most part companies accept over-reimbursing high mileage business travelers. However, the low mileage business travelers should cause you concern. If a low mileage business traveler can prove that their expenses exceed their reimbursement, they could file a labor code violation—and if there are enough of these low mileage drivers, this could turn into a class action suit.
If you have employees working in California, you should especially pay attention to this concern. California Labor Code 2802(a) is the strictest reimbursement law in the country and can create headaches for companies paying the standard mileage rate.
With the IRS mileage rate, your mileage log calculations will drive your costs.
The standard mileage rate can get expensive and out of control if you are not using a 21st-century mileage log. The rate is easy calculate, and you would expect a simple mileage log to do the trick. However, it is not that simple.
Microsoft Excel mileage logs seem to be the choice for a lot of companies. These types of mileage logs require not only a separate appointment or call log, but also a process to calculate the business mileage. This creates several problems. First, a spreadsheet mileage log requires a significant amount of unproductive time for a simple task. Second, many mobile employees will unfortunately take short cuts to reduce the time required and will estimate mileage. Not only is manual recording prone to errors, but an overstatement of mileage will cost the organization.
Now, there are a quite a few mileage-tracking solutions that integrate with your existing business systems to track mileage—not employees—in an accurate and real time method. Avoiding self-reported mileage logs is a big opportunity to save time, mileage, and money. However, by continuing to allow employees to self-report mileage, you are giving them a blank check for mileage.
Reimburse without paying the IRS mileage rate.
A small mileage tracking upgrade will go a long way to save the company money and time, but changing the type of reimbursement policy will go an even longer way. Implementing an IRS accountable plan that was designed for business vehicle reimbursements instead of for personal tax deductions will significantly reduce costs over time.
If you are looking for alternatives to the government mileage rate or tools to help you better manage costs and productivity contact mBurse today for a free evaluation.