The Internal Revenue Service (IRS) refers to the deductibility of costs automobile owners incur while operating a personal vehicle for business, medical, charitable, or moving purposes by the term "mileage allowance."
The IRS advises deducting $0.56 for business use, $0.14 for charitable purposes, and $0.16 for some medical expenses and moving expenses per mile (for 2020, these amounts are $0.575, $0.14, and $0.17, respectively).
In order to determine the cost of owning and operating a car for tax-deductible reasons during a specific tax year, taxpayers can, but are not required to, use the IRS mileage allowance. Instead of utilizing the normal mileage rates, taxpayers can determine the true costs of operating their vehicle. If you go with this strategy, make sure to have supporting documentation to show that your cost estimates are accurate.
Fuel, gas, oil, tyres, maintenance and repairs, insurance, and depreciation of the car are all covered by mileage reimbursement. Personal detours of any kind are not considered mileage expenses by the IRS since they must be ordinary (normal or recognised in the industry) and essential (useful or appropriate to the business).
Consider a scenario in which an employee drives 60 miles to attend a workshop. They quickly stop at a cafe 10 miles away after the session to meet their friend. They would only be compensated for the 120 miles of business-related travel when they returned to the office after travelling 140 miles.
Following are some instances of legitimate reimbursement requests:
- Driving for business purposes to the airport or railway station
- Getting there: at a temporary job site
- Visits to the bank or to the store for professional purposes or purchases
- Driving to trade events, meetings, and seminars or to meet clients off-site
If the employee owns or leases the vehicle
The employer is responsible for covering the costs of owning and operating the vehicle as mentioned above when it is utilized for work.
If the employee is self-employed on the side
The employee must keep two distinct logs of business travel—one as an employee (for which the employer pays the expenses) and another as a sole proprietor.
If an independent contractor or a consultant owns or leases the vehicle
Typically, employers do not reimburse contractors and consultants for mileage (such as contractors who work for food delivery and ride-sharing services).
If the vehicle is provided by the employer
Depending on the agreement, the employee may still be compensated for the costs associated with operating and using the vehicle.
While there is no federal need for US corporations to pay employees who drive their own cars to work, certain businesses must comply with state laws. Ironically, companies must repay employees for all business-related expenses under federal law, and if they don't, the employee's net compensation may be below the federal minimum wage. In this situation, failing to pay the minimum wage exposes companies to legal action and related sanctions. For this reason, businesses should examine their state regulations and consult with legal advice before developing a mileage reimbursement policy.