If you drive a personal car for business reasons, your employer may provide a mileage expense reimbursement. Here's a quick guide on calculating your reimbursement.
How to Calculate Mileage Expenses Reimbursement
You'll want to keep a mileage log book of all your drives. Nowadays, companies prefer a digital mileage log like those generated by MileIQ. Make sure you're including:
- Dates of your drives
- Distance of your trips
- The business purpose of your drives
- The potential value of these drives
- Any additional vehicle expenses that are relevant.
To determine what your business miles are worth, multiply the miles driven by the mileage rate set by your employer. For example, let's say you drove 224 miles last month and your employer reimburses at the Standard Mileage Rate of 58.5 cents per mile. Your mileage reimbursement would be $122.08 (224 X 58.5 cents = 131.04).
The same principles apply if you are self-employed.
Does My Company Have To Provide A Mileage Expense
There is no federal law requiring a mileage reimbursement. But, many companies offer this for the purpose of keeping employees happy. States like California do require companies to provide some compensation for the business use of their vehicles. In California, this can be a car allowance or a mileage reimbursement.
Are Reimbursed Mileage Expenses Taxable Income?
If your business has an "accountable" plan, the employer doesn't have to include these costs as part of taxable wages. The accountable plan must meet the following conditions:
- Connected to the Business: The employee must have incurred the expenses in relation to their business services.
- Substantiation: The employee must provide documentation of these expenses. For mileage reimbursements, this is often an official mileage log.
- Return Excess Amount: Employees must return any excess amounts in a reasonable amount of time.
What Qualifies for Mileage Reimbursement?
The first step to calculate mileage expenses is to determine what qualifies for mileage reimbursement. Daily commutes do not count as an expense under current IRS regulations on their website. As a rule of thumb, a trip must be to exclusively carry out work and represent the employer.
Examples of qualified mileage reimbursement expenses include:
- State/international business trips
- Secondary on-site visits to clients and prospective clients
- Retrieving business supplies
- Deliveries
The standard mileage rate helps to cover all the expenses of using a company and/or personal employee vehicle, including gas, maintenance, and auto insurance. Charges based on parking and tolls don’t apply, so employers are advised to reimburse employees for these expenses directly.
Employees need to know how to calculate reimbursement amounts to ensure they are not left out of pocket. The IRS mileage rate ensures these expenses are not a taxable employee expense and that employers can claim the mileage tax deduction.
Additionally, while commuting costs cannot be incorporated when you calculate mileage expenses, HR departments may still choose to offer reimbursements as a workplace benefit.
How Do You Generate Mileage Expenses?
Knowing how to calculate mileage cost requires you to generate mileage expenses. Not only is this vital for coming up with an accurate figure, but it will also be needed in the event you receive an IRS audit.
Calculate mileage expenses by picking out qualifying costs. Any travel from the office to a work site, second place of business, to a client, or a customer counts as a qualifying expense. Furthermore, any business-related errands also qualify.
You cannot use a company vehicle for medical or charitable use and claim the mileage.
There are two methods of calculation you can choose to use. The standard mileage deduction is the simplest and most common method employed to calculate mileage expenses. The IRS has set the deduction at $0.58 per mile for the 2022 tax year.
You may also use actual vehicle expenses. This deduction requires you to train documentation and any receipts related to driving costs, such as repairs, gas, depreciation, and maintenance.
Try both methods to calculate mileage cost to determine which option will allow you to deduct the largest amount.
The process begins by recording your odometer for the start of each tax year. You will need to report the total number of miles driven throughout the year on Form 2106. New vehicles brought into service during the tax year should have their odometers recorded on the first day of deployment.
If using the standard mileage deduction, you must maintain a driving log to calculate mileage expenses. The IRS demands accurate records and outlines this requirement explicitly in its content. To do this, you must
- Before every qualifying trip, record the odometer reading, list the purpose, starting point, ending point, and date.
- Record the final odometer reading at the end of the trip and subtract the initial reading from this final figure to generate mileage expenses.
If using actual car expenses, you do not need a moving log. Instead, you will need to maintain a record of relevant receipts.
At the end of the tax year, record the final mileage from the vehicle’s odometer. Fill out Form 2106 and list the total miles driven. Use a calculator to determine the dollar deductible amount to confirm your tax deduction. To maintain your own security, make sure you retain all documentation for at least three years, as you will need to show this if the IRS decides to launch an audit.
