Business mileage reimbursement can be confusing. Especially if you don’t spend your days thinking about vehicle programs. That might be why you found yourself searching for federal mileage allowance. We’re here to remove that confusion and get you up to date.
Full disclosure, federal mileage allowance isn’t a thing. Rather, it’s a combination of two different vehicle-reimbursement methods: the IRS mileage rate and the car allowance vehicle program. Confusing, right? Let’s clear that confusion up and dig in a little deeper.
The federal mileage part of the term federal mileage allowance is simple. The IRS mileage rate has many names you may recognize: the federal mileage rate, the annual IRS rate, the federal business mileage rate, etc. Every year, the IRS gathers data to determine what the yearly rate should be. The rate is a guideline for businesses reimbursing their employees at a cents-per-mile rate. As long as their reimbursements for mileage fall at or below the IRS rate, those reimbursements will be tax free. If the reimbursement is above the IRS mileage rate, then it is taxable.
We should also note that this rate was previously used by W-2 employees to claim un-reimbursed business mileage on their taxes. We say previously because it’s not an option anymore. With the passage of the TCJA in 2016, W2 employees can no longer deduct this mileage. Self-employed workers may still use this rate to deduct mileage.
The allowance part of the term federal mileage allowance is also simple. A car allowance (also referred to as a vehicle allowance, auto allowance, etc) is a vehicle program where the employer pays employees a monthly stipend for the business use of their personal vehicle. While there is a typical yearly average, it’s not a number recommended by the IRS. In fact, it’s almost the opposite.
With a car allowance vehicle program, driving employees do not have to keep track of their mileage. Because car allowances are not tied directly to miles traveled, the IRS considers them “additional income.” That makes the car allowance taxable.
When we add the two pieces of the puzzle together, we have an allowance that is approved by the IRS. While the IRS does release a cents-per-mile rate annually, it does not do something similar for allowances. As shared above, payments for business use of personal vehicles are only non-taxed when they’re tied directly to mileage. So how does that work for traditional mileage reimbursement programs?
Companies using a mileage reimbursement, or a cents-per-mile rate (CPM), to pay their driving employees generally do so at or below the IRS mileage rate. But, to receive reimbursements, each driving employee must submit a mileage log. It’s essential that these mileage logs are IRS compliant. To meet those standards, each one must include the following: the date, the starting and ending locations, the miles traveled and the business purpose. Without compliant mileage logs, employers can’t accurately reimburse employees.
As stated above, there is no federal mileage allowance that the IRS announces each year alongside the annual IRS rate. However, there is a way to minimize the tax waste of a car allowance program. Allow us to introduce the accountable allowance.
With an accountable allowance, employers still pay their employees for the business use of their personal vehicles. However, this program also requires driving employees to track their mileage. No, those monthly stipends are tied to the mileage logs the drivers submit. If the amount they receive each month is above the IRS rate, only the amount over the rate is taxable. Let’s look at an example.
Florence is a sales rep for a machinery company. In one month she drives 700 miles. Her monthly allowance is $575. Multiplying her monthly mileage by the IRS mileage rate of 62.5 cents per mile, up to $437.5 of her stipend won’t be taxed. The remaining $137.5 will still be taxed as additional income.
There are a few major problems with an accountable allowance, or “federal mileage allowance” if we want to call it that. Let’s take a look at another example.
In a particularly busy month, Florence drives a wild 1400 miles. Multiplying that number by the 2022 IRS rate, we find two things. The good news is, all of her stipend will be tax free for the month! The bad news is, her stipend of $575 does not cover the costs of driving for that month. For context, she would be receiving $875 with a typical mileage reimbursement.
Employees that don’t receive adequate reimbursement quickly become disincentivized to drive additional mileage. To avoid disgruntled mobile workers, companies may look for solutions like fuel cards. Unfortunately, that creates more problems than it solves.
Another issue with an accountable allowance, or any allowance, is it fails to reimburse employees for the costs specific to their area. An employee in a lower cost state like Kansas may be content with their stipend while an employee on the same stipend in a higher cost area like New York will struggle with theirs. If a company already requires its driving employees to record their mileage, shouldn’t they just use a more accurate reimbursement like mileage reimbursement?
As stated above, a mileage reimbursement will do a better job of helping mobile workers cover the actual costs of driving for work. So companies considering a federal mileage allowance should jump to mileage reimbursement instead? Well, mileage reimbursements aren’t without their own issues.
First, mileage reimbursements can be difficult to budget for. Whether the industry is very seasonal, or the driving employee’s schedule is erratic, when the mileage varies, so do the reimbursements. That makes planning for those payments a serious challenge.
Second, the IRS mileage rate, the rate most companies use when reimbursing their employees, is a rate that covers the United States. As stated above, there are some pretty big cost disparities from state to state. This means that, much like a car allowance, it does not reimburse employees accurately to their localized cost of vehicle operation and ownership.
Reimbursing employees accurately is a common challenge with mileage reimbursements. Unlike many other vehicle programs, there’s an ideal scenario for this program. Companies with a smaller pool of regional drivers traveling less than 5,000 miles each month are perfect for mileage reimbursements. Companies with a larger, more widespread mobile workforce of high mileage employees
The federal mileage allowance might not be the best fit for your company. Maybe that’s because it doesn’t exist, maybe that’s because the closest thing to it fails to accurately reimburse employees. Regardless, finding the right program for your company can be challenging. But we’re here to help! You can learn more about vehicle programs in our blog post, The Guide to Vehicle Reimbursement Programs.