The Ins and Outs of Mileage Reimbursement

May 5, 2020
Empty Highway

The impact of COVID-19 and the ensuing uncertainty has caused many organizations to review otherwise standard operating procedures. What began as office closures now includes potentially permanent remote or flexible work arrangements.

A key consideration for organizations is mileage reimbursement, specifically the reimbursement of mileage to an employee using their own vehicle for employer business purposes.

Understanding Mileage Reimbursement
Mileage reimbursement, unless paid through a qualified accountable expense allowance arrangement or plan, is considered compensation for an employee using their personal vehicle for business mileage. A qualified accountable expense allowance arrangement requires an employee to substantiate expenses and does not allow an employee to retain any reimbursement amount in excess of the substantiated expenses covered under the arrangement. Mileage reimbursement for employees may include, but is not limited to:

  • Running errands for the business
  • Customer appointments
  • Driving to and from business training events

Each year, the IRS issues a standard mileage rate which organizations can use to calculate mileage reimbursement for their employee’s business mileage. For 2021, the IRS mileage reimbursement rate is 56 cents per mile driven for business use.

Does your organization provide vehicles to its employees? Then you need to be aware of personal use of company vehicle.

How Mileage Reimbursement Previously Worked
Prior to COVID-19, an employee, typically assigned to one office location, would use reimbursement guidelines for business mileage driven. Typically, the employee would consider their assigned office location as the starting point for determination of reimbursable miles. Using this methodology, reimbursement for their commuting miles, getting from their personal residence to their assigned office location, would not be reimbursed.

There were those occasions where, on a given day, an employee having no need to first go to their assigned office location could go directly to an employer business event for the full day or to multiple employer business events during the day without going to the office location. For these days, there was no adjustment required for the commute to the office to reduce the reimbursable miles driven. And, other combinations of employer business travel events would perhaps only require a single leg of the typical two-way commute mileage to be considered commuting.

The Impact of COVID-19 on Mileage Reimbursement
However, with the various required or protective closures of otherwise usual office location work due to COVID-19, a home-based employee work environment has been created. As a result, the question of how to handle the otherwise adjustable commuting mileage reimbursement for employee business miles driven needs to be addressed. And, those adjustments will likely also create the need for modification of existing mileage reimbursement plans.

While there should not be a need for an employee to change their substantiation of costs to be reimbursed, there will be a need to advise employees related to the documentation of the business mileage to be submitted. Employee taxation of reimbursed amounts will continue to be contingent on whether a reimbursement is made under an accountable or nonaccountable plan.

Mileage Reimbursement if the Office Location is Closed
The key element for making changes in a mileage reimbursement policy is having their usual office location closed. If the office location has been closed, there is no need for an employee to go to the office location before traveling to an employer business event. Therefore, there should be no need to adjust the reimbursed miles for commuting miles. The employer mileage reimbursement plan would need to be modified to record when the office closed and that until further notice the office would remain closed and employees are therefore not required to travel to the office to work.

Mileage Reimbursement If the Office Remains Open
However, several offices did not close for all operations. For those employees required to work at the office location, the reimbursement policies prior to COVID-19 events would be observed. Nothing really changes for these employees.

So how do you calculate mileage reimbursement for employees working from home? For those employees not required to go to the office location, document that they are serving at, and for, the convenience of the employer by working from their home location for the employer’s business purposes.

This is an important designation as it allows the principal place of employer business to transfer to the employee’s home for the determination of reimbursable business miles, even though the usual office location is still open for other functions. As a result, the employee does not have to consider a mileage reimbursement adjustment for the commute to the office because as it relates to mileage reimbursement, the employer office is now the employee’s home until subsequent events change such designation.

There are other potential employee deductions that could arise from working from home, especially when using an employee’s home for an employer’s business purpose. Those potential deductions require more complex analysis.

Keep Informed on IRS Mileage Reimbursement Rules  
Currently the IRS has not provided official guidance related to mileage reimbursement related to temporary COVID-19 workplace changes and none are anticipated. However, it’s important to keep informed on the release of new guidance by the IRS in case it modifies the way items like mileage reimbursement may be tracked in the wake of COVID-19.

Working from home can be a perk for many employees, especially during this time. But it can also have compliance ramifications for your organization.

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