Key Takeaways
- Mileage reimbursements from an employer for business use of a personal vehicle are not taxable if paid under an "accountable plan", which requires a business connection, adequate accounting, and the return of excess reimbursements.
- You should provide your employer with an adequate record of your car expenses (and receipts) within 60 days and return any excess reimbursements within 120 days.
- Reimbursement rates aligning with the IRS standard mileage rate (67 cents per mile for 2024 and 65.5 cents per mile for 2023) or a fixed and variable rate (FAVR) method are acceptable for the accountable plan criteria. Reimbursements exceeding this rate are taxable.
- Taxable reimbursements are included in Box 1 of the employee's W-2 form. Amounts up to the standard mileage rate or a FAVR are reported in Box 12 of Form W-2 with Code L.
Getting reimbursed
Once you get to work, do you ever drive your own car for a delivery or pickup, client visit, training class, or other business-related reason? If so, your company might reimburse you a certain amount for the use of your car on a per-mile basis. It’s great that you’re getting paid back for your auto expenses, but you might be wondering if you have to pay tax on the reimbursement.
Whether mileage reimbursements count as taxable income depends on a variety of factors. How your company handles reimbursements, how quickly you request reimbursement, how much you’re reimbursed, and other factors determine if the reimbursed amount is included as income on your next W-2 form.
And if a mileage reimbursement is treated as taxable income, can you claim a tax deduction for it? That’s a separate question that depends on the type of job you hold. In most cases, the answer is “no,” but a deduction is available for certain workers.
Let’s take a closer look at the taxation of mileage reimbursements for employees.
When is mileage reimbursement not taxed as income?
Generally, mileage reimbursements aren’t included in your taxable income if they’re paid under an “accountable plan” established by your employer. To qualify as an accountable plan, your employer's reimbursement policy must require you to:
- have a business connection for the use of your own car
- adequately account for the expenses within a reasonable period of time
- return any excess reimbursements within a reasonable period of time
Those are the basic requirements – but let’s flesh them out a bit.
First, to have a business connection, your reimbursed expenses must be paid or incurred while you’re performing services as an employee for your employer. A reimbursement must also be for a cost that generally qualifies for an employee expense deduction (even if you don’t qualify for a deduction yourself).
To adequately account for your expenses, you must provide your employer with a proper record of your expenses. You can do this by giving your employer a statement of expenses, account book, diary, or similar record in which you entered each expense at or near the time you paid or incurred it. Also provide receipts or other documentation supporting your expenses.
An excess reimbursement is any amount received for expenses that don’t have a business connection or for which you didn’t provide adequate records within a reasonable period of time.
What’s considered a reasonable period of time depends on the unique facts and circumstances of your situation. However, the following time periods are generally considered to be reasonable when it comes to the taxation of mileage reimbursements:
- a record of your expenses is provided to your employer within 60 days after you pay or incur the expenses
- excess reimbursements are returned within 120 days after you pay or incur the expenses
Calculating your mileage reimbursement
According to the IRS, you’ll fail the “accounting for your expenses” test if the amount of your mileage reimbursement isn’t based on reasonably accurate estimates of your actual car expenses. However, this requirement is generally satisfied if your reimbursement is similar to and not more than the “federal rate,” which for car expenses is defined as either the standard mileage rate or a fixed and variable rate (FAVR).
For 2024, the standard mileage rate for the business use of your car is 67 cents per mile (65.5 cents per mile for 2023).
Under a FAVR method, your car expense reimbursement is based on a combination of payments covering fixed and variable costs. For instance, a cents-per-mile rate might be used to cover variable operating costs such as gas and oil changes, while a flat amount is used to cover fixed costs such as depreciation, lease payments, or insurance.
When is mileage reimbursement taxed as income?
Reimbursements paid under a “nonaccountable plan” are considered taxable income. A nonaccountable plan is any employer reimbursement plan that doesn’t meet one or more of the three requirements listed above. If your employer repays you for car expenses by reducing the amount reported as taxable wages, salary, or other pay is also treated as a nonaccountable plan.
Even if your employer uses an accountable plan, any mileage reimbursements that don’t meet all three requirements for accountable plans are generally treated as having been made under a nonaccountable plan. So, for example, all or part of your reimbursement can still be taxed under the following circumstances.
Reimbursement of personal expenses – If you’re reimbursed under an accountable plan for expenses related to your employer's business such as driving your own car for business purposes and for personal expenses such as the cost of commuting to and from your regular workplace, the amount reimbursed for personal expenses is taxable.
Failure to provide a proper record of your expenses – If you’re reimbursed under an accountable plan, but you fail to provide the necessary records and documentation to your employer within a reasonable time, the entire reimbursement is taxable.
Failure to return excess reimbursements – If you’re reimbursed under an accountable plan, but you fail to return any excess amount, such as an amount above the standard mileage rate or a FAVR, within a reasonable time, the excess amount is taxable.
How are taxable mileage reimbursements reported?
Taxable mileage reimbursements will be included as compensation in Box 1 of the W-2 form you receive from your employer for the tax year. This will then be reported as income on your federal income tax return (Form 1040).
In addition, if your reimbursement is more than the federal rate, such as the standard mileage rate or a FAVR, the amount up to the federal rate is reported in Box 12 of your W-2 form using Code L. While the amount in Box 12 isn’t taxable, the excess reimbursement will still be included in Box 1 of your W-2 form.
TurboTax Tip:
If your employer’s reimbursement system meets all the requirements for an accountable plan, but your car expense reimbursements are included in Box 1 of your W-2 form, ask your employer for a corrected Form W-2.
Can employees deduct mileage for the business use of their own car?
Unfortunately, most people can’t deduct any current expenses for the business use of their own car. Before the 2018 tax year, workers could deduct unreimbursed business expenses as a “miscellaneous itemized deduction” to the extent all miscellaneous deductions exceed 2% of adjusted gross income. However, the Tax Cuts and Jobs Act of 2017 suspended this deduction for most workers for the 2018 to 2025 tax years.
Nevertheless, a small number of people who use their own car for business purposes still might be able to deduct their related costs. Those people include:
- armed forces reservists
- qualified performing artists
- fee-basis state or local government officials
- employees with impairment-related work expenses
If you fall into one of these categories, and certain requirements are met, you can deduct unreimbursed employee expenses, including for the business use of your personal vehicle. When calculating the deductible amount, reimbursements that aren’t included as income in Box 1 of your Form W-2 (including reimbursements reported under Code L in Box 12 of Form W-2) are subtracted from your overall business-related expenses.
In addition, when calculating deductible car expenses, you can use either the standard mileage rate or your actual expenses for operating your car for business purposes (e.g., gas, oil, repairs, insurance, etc.).
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