IRS Mileage & Travel Reimbursement Rules
Original post by Jeff Franco of Demand Media
If your job requires you to do some traveling using your own car, your employer may have a plan in place to reimburse you for those expenses. If you are not reimbursed, or if your employer reimbursed you under what the IRS calls a nonaccountable plan, then you may be able to take a deduction for your travel expenses. Knowing what kind of plan your employer uses is extremely important so that you don't take a deduction that is not allowed under IRS rules.
IRS Mileage Rate
The IRS allows two ways for calculating the cost of operating a car for business. The first way, calculating your actual car expenses, can be a cumbersome task since it’s not easy to determine the precise amount of gas your car consumes for each mile you drive, let alone other costs of operating your car for business. To avoid this recordkeeping nightmare, you can use the IRS standard mileage rate. The standard mileage rate is a fixed amount that you multiply by the total miles you drive for work-related purposes to arrive at your potential deduction. A notable advantage to using the standard mileage rate is that you don’t have to substantiate your expenses with receipts; instead, you track your mileage in a log. When calculating your car expenses, keep in mind that the standard mileage rate doesn’t cover the cost of highway tolls and parking charges – so you can always increase your deduction for these expenses.
Accountable Reimbursement Plans
If your employer reimburses you, you’ll need to determine whether it has an accountable reimbursement plan in place. Under an accountable reimbursement plan, your employer won’t include car expense reimbursements on your W-2 – meaning it’s not part of your salary that’s subject to income tax. In order for your employer’s reimbursement policy to be considered an accountable plan, it must meet three criteria: all car expenses for which you receive reimbursement must relate solely to your employer’s business; you must account to your employer for all car expenses within a reasonable amount of time after the travel and lastly, you must return any reimbursements you receive that exceed car expenses you calculate using the standard mileage rate. If your employer's reimbursement covers all expenses calculated using the IRS standard mileage rate, you cannot claim a deduction for the business use of your car. In addition, if you fail to return excess reimbursements, your employer will report those amounts on your W-2, meaning you must include them as income on your tax return.
Nonaccountable Reimbursement Plans
Some employers may have a less formal plan where they pay employees extra to cover travel costs. When your employer provides you with mileage reimbursements, but they don't meet the the three requirements of an accountable plan, the IRS doesn’t consider those payments to be reimbursements. As a result, all payments you receive are reported on your W-2 as wages. Since these wages will be reported and taxable as income, you can then claim a deduction for the expenses you incur for using your personal vehicle for your work.
Itemizing Car Expenses
One thing you should keep in mind is that in order to deduct nonreimbursed car expenses, you must itemize deductions and report them as “job expenses and other miscellaneous deductions” on Schedule A. However, before you decide to itemize, you may want to see if the standard deduction will save you more in taxes. In the event it’s beneficial for you to itemize, remember that the total expenses you report in this category of miscellaneous expenses aren’t 100 percent deductible. You can only deduct amounts that exceed 2 percent of your adjusted gross income.
Form 2106 Reporting
Claiming job-related car expenses on Schedule A may require the filing of Form 2106 or 2106-EZ as well. Form 2106 is necessary if you receive a reimbursement under an accountable plan that’s less than the expenses you calculate using the standard mileage rate, and you want to deduct the excess. If you didn’t receive any reimbursement, which includes payments from your employer that are reported on your W-2, you can file the shorter Form 2106-EZ instead.
- IRS: Publication 463 - Travel, Entertainment, Gift and Car Expenses
- IRS: Instructions to IRS Form 1040 (Schedule A)
- IRS: Instructions for Form 2106
About the Author
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.