A decade or so ago, mileage reimbursement was a foreign idea to many employers and employees alike. For one, no clause in our laws requires that employers reimburse employees for mileage. But many firms have decided do it as a sign of goodwill, and, of course, mileage reimbursement is a write-off tax expense. What’s more – companies are free to reimburse their employees at a rate that is lower or higher than IRS standard rate. That is, as long as they don’t violate any State statutes or laws.
What is Mileage Reimbursement?
This tax deductible expense is a way in which companies compensate employees for their mileage expenses. In essence, it’s for the cost employees incur while driving their vehicle for work, medical, charitable and moving purposes. It’s, therefore, important for employees to keep meticulous records of their business-related trips including gas bills, mileage logs, maintenance receipts, and other related charges like parking or toll fees.
Create a Succinct Reimbursement Policy
For a seamless reimbursement process, design and implement a comprehensive reimbursement policy that will guide the accounting department on how employees will be compensated for their mileage expenses. The policy should ingrain key aspects of mileage deduction like gas bills, maintenance and repair cost, as well as whether an employee uses a private or company vehicle. And that isn’t all.
The policy, in essence, should define what constitutes business mileage – business-related driving. Travelling to and from work is typically not regarded as tax deductible. However, flying or driving out of town for business-related intentions like meeting and seminars are tax deductible. Also, business-related activities performed in or around workplace are also deductible. These include clients’ expenses, business meal, and much more.
Calculating Mileage Expense
When calculating mileage expense, you must have a few tips up your sleeves so that mileage deduction can work in your favor. As a rule of thumb, there are two ways to arrive at the mileage expense to reimburse your employee. If an employee uses company vehicle but pays for gas and other related expense, you might want to settle for actual expense code. For this system to work, an employee must keep a neat record of all mileage experiences. Reimburse the employee in cash, and then claim the payment as a tax deduction.
The other way is to use standard mileage rate (SMR), which for 2016 stands at 54 cents per mile. The approach compensates the worker for an approximate cost of gas and maintenance using a basis of cents per mile. There is a raft of software and online resources that can help come up with the final figure.