The Internal Revenue Service recognizes certain transportation costs as deductible expenses. Miles driven that directly relate to your business are one such cost. You may choose to reimburse your employees for miles they drive on your behalf, or your clients may choose to reimburse you for your own mileage. Rather than claim your actual expenses, you might prefer to use the standard IRS mileage rate.
Standard Mileage Rates
The IRS reviews the standard rate annually, which typically results in an adjustment for the upcoming year. For 2013, the standard rate for reimbursed business mileage is 56.5 cents per mile. You can only use this rate for miles that directly relate to business. If you reimburse employees for moving expenses, you should use 24 cents per mile for the employee’s costs related to the move. This is the same rate to use for medical mileage. The 2013 rate for the miles driven for charitable purposes is 14 cents per mile.
Included in Standard Rates
The IRS calculates standard mileage rates to include a reasonable allowance for repairs and routine maintenance, depreciation, insurance, property taxes and registration as well as gas and oil. If you use the standard rate, actual expenses for these items become non-deductible. Because actual expenses can exceed the standard rate, the IRS recommends computing taxes under both methods to determine the most beneficial method. Not included in the standard rate are expenses paid for tolls and parking at locations other than your place of business. These expenses can be reimbursed in addition to the reimbursement for miles driven.
Reimbursed business expenses are not taxable as income if paid under an accountable plan. An accountable plan requires the return of any amounts that exceed the standard rate or actual expenses as well as satisfactorily accounting for the expenditures. For standard mileage rates, a written record of the number of miles driven, date, destination and purpose of the trip are normally sufficient. This can be in the form of a daily log, journal or company report. If you or your client do not have an accountable plan, excess reimbursements are not returned or no accounting for expenses is provided, the reimbursements are taxable income. For employees, include the payments as wages in box 1 of the employee’s Form W-2; for independent contractors, the payments are included on the Form 1099.
Reimbursements at Other Rates
Your client can choose any rate he desires for your mileage reimbursement, just as you are free to reimburse your employees at whatever rate you choose. However, reimbursements that exceed the IRS standard rate are taxable income unless the excess portion is returned. If the reimbursement is less than the standard rate, the additional portion is a deductible expense. To illustrate, if the current rate is 56 cents per mile and your client reimburses you for 20 cents per mile, you can take the additional 36 cents per mile as a business expense.