Mileage deductions are allowable reductions from income used by companies to write-off business-related mileage from their taxable income. Often, these deductions are part of a business’s larger benefits package that provides traveling employees tax-free reimbursements on their business travel and transportation expenses, all while maintaining compliance with applicable tax law and IRS standards.
These tax-free reimbursements are made possible by establishing “accountable” plans to cover employee expenses. While these plans allow employees to receive tax-free reimbursements for qualifying business costs, there are certain regulations that must be followed to maintain compliance with federal regulations:
It’s important to note that not every trip taken in a vehicle can be deducted. The IRS has well-established guidelines for which trips are considered business-related and which are considered personal. Broadly, business trips eligible for mileage deductions include:
However, there are several notable exceptions that cannot be deducted:
When using the IRS standard rate for business-related mileage (53.5 cents/mile), businesses can simply multiply their total mileage by this value for each reporting period to receive their deduction total.
Keep in mind that while the IRS standard mileage rate is the easiest to use, it may not produce the highest deduction total to which a company could be entitled. The IRS allows for businesses to deduct actual expenses of operating vehicles for business based on the actual cost of, gas, oil, repairs and maintenance, and vehicle depreciation. When each of these unique factors is applied, businesses can receive the maximum total deduction as afforded to them by law. However, actual cost deductions are subject to the same level of scrutiny as the IRS standard rate and must be justified with the appropriate documentation.
Mileage deductions are an effective way to reduce tax liability for businesses that rely heavily on business-related transportation and provide for tax-free reimbursement to employees. However, adequate record keeping of travel expenses is a must. Businesses must have a system to record, monitor, and log all travel mileage and costs to make full use of the deduction strategies at their disposal.