Probably one of the most common reimbursements or allowances an employer makes to an employee is for the employee’s vehicle usage.
This is generally paid as either a flat allowance amount or as a “cents per mile” reimbursement. And to answer one of the audiences questions, the reimbursement could also be at the actual cost incurred by the employee with receipts submitted under an accountable plan.
In general, if a government employer reimburses auto expenses under an accountable plan, the reimbursement is not taxable to the employee. Additionally, the expense would not be deductible by the employee on their personal tax return since the reimbursement was not included in the employee’s income.
The employee is required to follow the accountable rules of providing the date, mileage, and business purpose for the mileage they submit.
What are Allowable Mileage-rate reimbursements for business travel?
Allowable Mileage-rate reimbursements for business travel are excludable from the wages of the employee if paid at or below the standard Federal mileage rate. The employee must follow the accountable plan rules and account for the business miles driven.
As of January 1, 2013, the standard mileage rate is 56.5 cents per mile.
If the employer’s reimbursement rate exceeds the standard rate, the excess amount is taxable to the employee as regular wages. When there is an excess reimbursement, the nontaxable and taxable amounts are reported on form W-2 with:
- The amounts up to the Federal mileage rate reported in box 12, code L AND
- The amounts in excess of the Federal mileage rate Is included in boxes 1, 3, and 5 if applicable for that employee.
In other words, the taxable portion is reported the same as any other compensation in boxes 1, 3, and 5 with the withholding reported in boxes 2, 4 and 6.
If a government employer reimburses an employee’s mileage under an accountable plan substantiating the business mileage, and the reimbursement is at or below the Federal mileage rate, then:
- The reimbursement is not taxable to the employee.
- There is No income tax withheld. AND
- There is No reporting required on form W-2.
If reimbursements are not paid under an accountable plan, or the reimbursement exceeds the allowable amounts, the money, or a portion of it, is taxable as wages.
As was mentioned earlier, the government agency has the option of reimbursing the employee for actual expenses, such as fuel cost.
These reimbursements are excludable from the employee’s compensation, under an accountable plan. The employee must document expenses and the connection to the business.
Expenses that are personal in nature like commuting are never excludable and reimbursement for such personal expenses should be included in the employee’s taxable wages.
Regardless of how the reimbursement is calculated, in order for it to be considered paid under the accountable plan rules, the employee must provide substantiation to the employer. The travel substantiation rules require the employee to record
- the date
- business purpose
- and location
The regulations require that mileage be recorded at or near the time the mileage is incurred.
For example, monthly expense reports generally meet this requirement.
Government employees using government owned vehicle
You should know when an employer provides a vehicle to an employee solely for business purposes there are no tax consequences or W-2 reporting required and the business use is treated as a working condition fringe benefit. However, employees are still required to keep trip records.
Remember business use does not include commuting. Employees need to maintain records to substantiate that all vehicle use was for business purposes.
What happens when the vehicle isn’t used solely for business use?
If an employer-provided vehicle is used for both business and personal use, the substantiated business use is not taxable to the employee however the personal use is considered a fringe benefit and taxable as wages.
There are a couple of options for the government and the employee in this situation. If the employee fully substantiates the business and personal use, the Government has the option to tax only the personal use of the vehicle, OR the employee has the option to reimburse the employer for personal use rather than having it treated as wages.
The Government also has the option to include all use as wages and notify the employee that they are reporting the full amount. Then it is up to the employee to substantiate the business use and deduct it from their – personal tax return, form 1040 schedule A.
We have already discussed that commuting between the residence and work is considered personal use. Vacation, weekend use AND use by a spouse or by dependents is also considered personal use.
An exception to personal use limitation is use that qualifies as de minimis. A few examples of excludable de minimis use of an employer-provided vehicle include:
Small personal detours while on business, such as driving to lunch while out of the office on business OR Infrequent personal use.
Infrequent personal use is generally less than one day per month. This does not mean that an employee can receive excludable reimbursements for commuting 12 days a year. Keep in mind that this rule is available to cover infrequent, occasional situations.
Let me give you an example to illustrate de minimis use. Say an employee uses a government motor pool vehicle for a business meeting. The government requires employees return motor pool vehicles at the end of the business day, but the employee is delayed and the motor pool is closed when the employee arrives back at the office. The employee takes the vehicle home and returns it the next morning.
Assuming that this is an infrequent occurrence for that employee – generally happening no more than once a month, the commuting value of the trip is a nontaxable de minimis fringe benefit.
However, if this tends to be a frequent occurrence, the commuting is taxable to the employee.