New Tax Law May Affect Mileage Reimbursement Policy for Employers

by Nexsen Pruet, PLLC
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Nexsen Pruet, PLLC

Outside of potential minimum wage issues, there is no federal law requiring employers to reimburse employees who use their personal vehicles for business purposes.

While employers must reimburse employees for business-related mileage in some states, neither South Carolina nor North Carolina has such a mandate. But most employers offer reimbursement anyway, usually for recruitment and retention purposes or for a general sense of fairness. Reimbursements made at or below the Internal Revenue Service standard mileage rate (currently 54.5 cents per mile) are not treated as taxable income to the employee. 

In the past, employees who were not reimbursed for business mileage-related expenses could deduct those expenses from taxable net income. The unreimbursed mileage deduction was allowed along with other “unreimbursed work-related expenses” where all unreimbursed work related expenses in excess of two percent of gross income would be deductible. Outside sales employees, for example, who logged significant mileage on their vehicles but did not get reimbursed by their employer could potentially get a deduction for those mileage expenses on their personal taxes.  However, the Tax Cuts and Jobs Act in effect for the 2018 tax year eliminated many itemized deductions, including unreimbursed employee business expenses. 

Employees affected by this tax change may approach employers about this potential impact on their bottom line and push for a new or revised reimbursement policy to recoup these “tax losses.”  

Employers should keep the following issues in mind if they are inclined craft such a policy:

  • Most companies use the IRS business mileage rate for business-related expenses. The standard rate is based on an annual study of the fixed and variable costs of operating an automobile throughout the country in the previous year.  The IRS rate for 2018 for business travel currently stands at 54.5 cents per mile.
     
  • The IRS rate is only a guideline, and employers can choose to reimburse at a lower or higher rate. Some employers use a fixed and variable rate program that incorporates geographically specific variable expenses to produce more precise reimbursements. Others simply reduce the reimbursement rates in areas of the country where it is cheaper to drive (e.g., South and North Carolina). Employers that reimburse more than the IRS rate may be required to treat such payments as taxable income.
     
  • Employers may balance the need to establish a new or revised reimbursement policy with the reality that the individual income tax rates were reduced, so the reduced tax liability could offset the need to fully reimburse for business mileage.
     
  • Some companies use a “flat fee” or mileage allowance program. Such policies must have defensible reimbursement rationale to prevent the fees from being treated as  taxable income to the employee.  In these instances, employers need to establish, through policies compliant with the “accountable plan rules,” that the allowance or reimbursement is under the amount that would be allowed under current IRS guidelines.
     
  • The failure to reimburse or adequately reimburse employees (through reduced mileage rates, flat fees or allowances) should never inadvertently place the worker below minimum wage. For example, any work-related expense incurred by an employee that would take the employee below the minimum wage must be reimbursed or it could violate the kickback rule under the Fair Labor Standards Act. Some food delivery workers making minimum wage, for example, have sued their employers who paid a flat fee per delivery that fell short of the IRS business mileage reimbursement had they been reimbursement by the mile.
     
  • Mileage reimbursement can be subject to both abuse and audits. Mileage reimbursement policies should therefore include such requirements as valid driver’s license and the need for adequate and legally required automobile insurance. The policy should exclude non-reimbursable activities such as personal trips or daily commutes to and from an employee’s home to the office. To withstand any scrutiny, all such policies and reimbursements should demand appropriate documentation consistent with tax law and/or other needs of the business accounting department.
     
  • Obviously, other alternatives available to employers are car allowances and employee use of company-owned vehicles. Each of these options may have some impact on the employee’s income, however, and present other potential attendant tax or legal liabilities.
     
  • Employers can use a certain amount of creativity with mileage reimbursement programs so long as it does not count as unreported taxable income to the employee or, as noted above, drop the employee below minimum wage. For example, employers can reimburse for mileage outside of a specified geographic territory or where the drivers travel more than a certain number of miles in a given day or week. Also, the mileage reimbursement can be capped at a set number of miles.  These arrangements should be clear and in writing, and can be tailored to the business needs of the company.
     
  • More and more employers are turning to GPS-enabled smart devices or mobile apps to automate employee mileage tracking and accurately account for business-related mileage. Many also use third-party vendors to efficiently track and reimburse mileage for a mobile workforce in order to ensure accurate compensation and to create IRS-compliant mileage logs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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