If your employees use their cars for work, you probably have or are considering an employee mileage reimbursement program.
The IRS allows employers to reimburse employees for work-related travel expenses. And the employers, in turn, can deduct what they pay out in reimbursements.
While there is no federal law requiring employers to reimburse for work-related car expenses, many companies have adopted this practice as an employee benefit and tax write-off.
Benefits are great, but protecting your business from IRS audits it critical. Make sure your employee mileage reimbursement program avoids these four common pitfalls.
Mistake #1: Counting Expenses Twice
There are two methods you can use to calculate business-related auto expenses. Standard mileage rate, and actual expenses.
Standard mileage rate is the easier of the two to track, so it’s the more popular method. However, like most tax deductions, it is not without its complications.
Deducting both the standard mileage rate and other large expenses, such as car repairs, is a common mistake. And one that will likely attract attention from the IRS.
The IRS already factors in standard costs, like repairs and gas, into the standard mileage rate, which changes year to year. So don’t reimburse any car repairs if employees will be using the standard mileage rate later on.
Be sure to make this clear up-front to workers who participate in your employee mileage reimbursement program. A surprise about what will actually be reimbursed can turn a positive benefit into a negative hassle.
Mistake #2: Lack of Effective Tracking and Proof
Documenting business mileage is critical to any employee mileage reimbursement program.
The IRS explains the guidelines for recordkeeping in section 5 of IRS Publication 463.
To prove business travel, you must record and account for every reimbursement payout to the employee.
Have your employees keep records of each trip. These include:
- Mileage of each business trip
- Date of the trip
- Destination of the trip
- Purpose of the trip
The IRS also asks for the total miles traveled over the year, the day the vehicle started being used for business and how much was paid for the car and any improvements.
Sounds simple enough, right? The problem is with execution. Inconsistencies and incomplete records can plague a company without a clear system in place.
Spreadsheets and notes work, but they can be hard to access on-the-go. And the IRS requires timely records, preferably created at the time of the expense or trip.
This means that mileage logs with only round numbers or almost no variation in distance will stick out. The mileage of the exact same trip will vary day-to-day with traffic patterns and volume.
Instead, look into a system where employees can easily track mileage via their mobile device. Look for something that involves as few steps as possible and stores the data in a secure, coherent manner.
There are options that allow GPS mapping of each trip. Others, like Fetch, allow an employee to enter context and a mileage total for a trip, and submit it immediately to an admin for approval and reimbursement.
Fetch allows the company admin to set a custom reimbursement amount per-mile, and automatically calculates the total based on the mileage the user enters.
An accurate and well-organized mileage log is a big plus. It lessens the likelihood of an audit and protects your business from penalties if you are picked for one.
Mistake #3: Counting mileage from home to work
This is a critical point to make clear in your employee mileage reimbursement program. Mileage from home to work, and from work to home, does not count as business use.
This can come as a surprise to some people, so here it is again: according to IRS Publication 463, commutes are considered personal expenses.
This rule also applies if the employee works during their commute. So that self-driving car won’t help employees earn any more business mileage to be deducted.
Make sure employees know this before starting to track their mileage. Even if it’s a mistake, reimbursing for personal mileage can create a major headache in the case of an audit.
Mistake #4: Counting office parking fees
Fees to park vehicles at your place of business are non-deductible commuting fees, according to IRS Publication 463.
Many employees pay for street parking or for parking passes to come to work. These expenses are non-deductible, and shouldn’t be reimbursed under a mileage reimbursement program.
However, parking fees for visiting with clients or customers are deductible. So it is fine to include them in a reimbursement policy.
Once again, it’s important to make this clear in the policy. Make a clear differentiation between the two types of parking fees if you will be reimbursing employees for visiting clients.
Setting up a mileage reimbursement program can be a challenge. But, make sure you don’t make these four mistakes, and you’ll be off to a good start.
Remember, always keep employee policies easy to understand. It’ll make life easier for everyone.
Have you seen other mistakes or been confused by a mileage reimbursement policy? Let us know in the comments.