Mileage Reimbursement Laws

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Done right, mileage reimbursement payments can be a tax deduction for businesses and excluded from the employee's taxable income. However, to receive this favorable tax treatment, businesses and employees must comply with a few Internal Revenue Service guidelines. Employees who aren't fully reimbursed for mileage expenses may deduct the unreimbursed portion as a miscellaneous deduction.

Business man in car
Business man in car (Image: Jupiterimages/Stockbyte/Getty Images)

Deductible Mileage Reimbusement Plans

Employers are not legally obligated to reimburse mileage expense incurred by employees. However, many choose to do so because the business expense is deductible for tax purposes. In order for a business to claim mileage as a tax deduction, it must maintain documentation of all expenses it reimburses for driving purposes. For example, an employee who wants reimbursement of gas purchased on a business trip must supply the gas receipt to receive a reimbursement. Also, employees cannot be reimbursed for miles driven as part of their normal commute to work.

IRS Standard Mileage Rate Plans

To simplify the record-keeping process, the IRS allows businesses to reimburse employees based on a standard mileage rate. This rate is designed to account for the average cost of gas, maintenance, repairs, licenses, car insurance, registration and depreciation on a per mile basis. The standard mileage rate was 56 cents per mile driven as of the 2014 tax year, but it is updated on a periodic basis. Under this mileage reimbursement plan, the employee only needs to maintain a log of driving activity and note the business purpose for each trip.

Taxation of Mileage Reimbursement Payments

As long as the business has an accountable plan, the employee doesn't have to report any mileage reimbursement as income. To be an accountable plan, the employee must verify that the expense is business-related, relay the expenses in a reasonable period of time and return any excess reimbursements received. If the employer's plan doesn't fulfill these standards, it is a nonaccountable plan and reimbursements are taxable. In this situation, reimbursements are reported along with other wages in the employee's annual W-2.

Tax Deductions for Employees

If your employer doesn't fully reimburse you for mileage expenses, you may be able to deduct the unreimbursed portion as an itemized deduction. Unreimbursed employee expenses are recorded as employee business expenses on Form 2106. To calculate the expense, you can either add up all of the vehicle-related expenses you incurred for work or you may use the IRS standard mileage rate. Be sure to exclude any miles driven as part of your normal work commute. Miscellaneous itemized deductions like employee business expenses are deductible only after they exceed 2 percent of your adjusted gross income.

Other Mileage Expense

Along with unreimbursed mileage expense for business trips, taxpayers can also deduct miles driven for medical visits, moving and miles driven for a charitable organization. The IRS allows taxpayers a standard mileage deduction of 23.5 cents per mile for medical visits and moving and 14 cents per mile for charitable organizations. Taxpayers can deduct medical mileage as a medical expense on Schedule A. Miles driven for charity can be included in charitable deductions, which also appear on Schedule A. Moving mileage is deducted on Form 3903.

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