How is Mileage Reimbursement Calculated?

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The Internal Revenue Service (IRS) has a mileage reimbursement rate that is used to calculate deductible costs for running a car for;

  • business-related drives
  • charitable purposes
  • medical purposes
  • moving to a new home

The reimbursement rate is adjusted every year, and it is determined by calculating the cost of operating a motor vehicle.

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The IRS studies the fixed and variable cost of operating a car to come up with the reimbursement rate.

For medical and moving purposes, the rate is based on the variable costs determined every year by the IRS.

How to calculate the reimbursement rate

The current mileage deduction rate went into effect on January 1, 2018. The IRS will announce the next rate on December 2018; it will go into effect on January 1, 2019.

The IRS will put into consideration consistent statistical analysis methods to calculate the vehicle cost components.

Among the things that the service will put into consideration include;

  • insurance premiums
  • vehicle deposition
  • maintenance costs
  • and fuel

It will also put into account the prevailing market prices. With a motor vehicle, you in incur expenses such as insurance, provision, tire replacement, repairs, gas and oil, and maintenance.

For moving and medical purposes, the rate will put into account costs such as gas and oil.

The law prescribes the charitable deduction rate.

Image from: Pixabay Images by geralt

What is the 2018 Mileage Reimbursement Rates?

The following are the standard mileage rates for the year 2018 that is used for mileage deduction on vehicles such as cars, pickups, vans, and panel trucks that are used in running a business.

  • 54.5 cents for every mile business-driven
  • 18 cents for every medical or moving purposes mile driven
  • 14 cents for miles driven for a charitable cause such as visiting a charitable organisation

Tax Deductions for Self-Employed or People Who Use Their Car for Business

If you self-employed or an employee who uses your vehicle for business travel, the IRS uses the standard rate to guide how you deduct your mileage tax.

An employer uses the IRS mileage reimbursement rate to reimburse his employees for all business-related travel using a personal vehicle.

An employee is required to provide sufficient evidence such as receipt or mileage report to prove that they used the private car for business travel.

A taxpayer is not allowed to use the IRS mileage reimbursement for tax on their income if they used depreciation method on the vehicle in the past.

Taxpayers have the option of documenting all the actual cost of running a vehicle and then offset them from the tax returns. Alternatively, they can use the IRS mileage reimbursement rate.

If for example, a taxpayer is a trainer or a consultant who drives to different client locations to perform his work, he must track both the locations where the services were offered under the total miles driven to and from the location.

The consultant is also expected by the IRS to track the miles driven for personal purposes.

When filing the returns season comes, he will need to compute both personal mileage and business mileage.

He will also be expected to provide sufficient evidence for all the miles he deducted from the tax for the IRS to verify the authenticity of the claims.

Employee reimbursement varies due to different employers and different industries where you use your personal automobile for business purposes.

The standard mileage rate is computed by an independent firm that is hired by the IRS to come up with a rate that reflects the market dynamics.

Government Employee Reimbursement

For government employees, the General Services Administration rate is computed by an independent firm.

This rate is used to reimburse the government employees when they use their privately owned vehicles on government business if the travel was authorised or there wasn’t any government vehicle available.

Automobile Expense Reimbursement Requirements

For you to qualify for automobile reimbursement, you will need to;

  • log your mileage
  • keep proper records of gas receipts and any other documentation for allowable expenses on your car

Use a smart technology such as GOFAR to track and log your mileage.

GOFAR helps you to find your car engine’s sweet spot and then guides you on driving efficiently to save fuel and reduce wear on your brakes.

Other areas where the GOFAR app and device can help you include;

  • Tracking the car mileage for tax deductions
  • Alerting you when the car has a fault
  • Explaining the car faults in plain English
  • Reminding the driver of ReGo & Insurance
  • Connecting drivers to top-rated mechanics and parts suppliers in Australia
  • Saving fuel by finding the engine’s sweet spot

If you don’t have sufficient evidence to support the mileage claims you have lodged; your deduction might be rejected by the tax authorities.

In some extreme cases, your employer might think you are being fraudulent and take disciplinary actions.

Never attempt to estimate your mileage. Many employers require contemporaneous record keeping, same as the IRS.

What are the Tax Consequences of Mileage Reimbursements?

As long as your mileage reimbursements are properly documented and do not exceed the actual expenses, they are considered tax free disbursements by the employers.

Your employer will never pay you directly for operating costs such as maintenance and other expenses that are directly related to transportation without tax consequences.

Most employers provide some monthly allowance for vehicle expenses.

If an employer requires you to furnish the record of expenses, you will only be taxed for the excess amounts you received whose records you didn’t provide.

As of 2018, the Tax Cuts and Jobs Act has been implemented and workers will not be able to deduct automobile expenses.

If you’re a worker who regularly drives for business purposes, you will need to be very careful when evaluating your company’s reimbursement policies.

If an employer does not reimburse for business miles driven, you might need to negotiate for a better salary in exchange for expense reimbursement.

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