Are Mileage Deductions an Option on Tax Day 2020?
It happens every year, like daylight savings time. Only, instead of going around the place trying to remember how to change all the clocks, you’re reporting your income and asset information to the IRS. A lot happens in the span of a year. You might forget a thing or two in the process. So here are some reminders.
Tax Day 2020
Tax Day, or the deadline for filing your 2019 taxes, is Wednesday, April 15. Be sure to add that to your calendar, or maybe set a reminder a few months or weeks in advance, depending on how ambitious you’re feeling.
The Tax Cuts and Jobs Act (TCJA)
In 2017, President Trump signed the Tax Cuts and Jobs Act into law. This law, which impacted taxes filed in 2019 for 2018, is still in effect today. One of the many impacts this law had on employees was removing tax deductions for unreimbursed business mileage and other itemized expense deductions. While this change did not impact independent contractors, it’s still a lot of money. To put it into perspective, taxpayers deducted $35 billion dollars in unreimbursed business mileage in 2016. And driving has only become more prevalent in the past three years. Not the happiest news for those not being reimbursed or being under-reimbursed for the business use of their personal vehicles. Many employers don’t realize the burden this imposed on their employees.
Revenue Procedure 2019-46
On November 14, the IRS released Rev. Proc. 2019-46. It changes Rev. Proc. 2010-51 to include the TCJA’s impact on the Internal Revenue Code, a.k.a. U.S. tax law. Those changes include the following line:
“For any taxable year during the suspension period, a taxpayer is not permitted to claim miscellaneous itemized deductions, including unreimbursed employee travel expenses.”
That’s pretty hard to argue with, right? Well, keep reading.
“However, in computing adjusted gross income, deductions allowed for expenses that are described in § 62(a)(1) or (2) are not miscellaneous itemized expenses and are therefore not suspended.”
On first reading, it appears taxpayers can’t claim a mileage deduction for business miles in a personal vehicle… but also can? Let’s explore what’s going on here.
Why this change?
The Internal Revenue Code (IRC) is more or less a labyrinth of legislation. If you printed it all out, it would likely fill a whole room with difficult to understand sheets. The TCJA was an addition to that, but sometimes it takes a season of tax filing and questions to identify topics that may need clarification. The TCJA took effect in 2018, and it’s normal for the IRS to issue guidance, or updates to keep all the tax regulations straight. The change made in November was to iron out noted wrinkles and tie up loose ends.
One of the lingering issues the TCJA attempted to address was itemized deductions. Taxpayers could claim a standard deduction, or they could itemize their taxes. Itemized deductions were great, but prone to abuse and required a good deal more effort to process. The TCJA simplified things by removing itemized deductions almost entirely. But a loose end remained. The standard deduction that worked as a replacement? It wasn’t quite accurate enough. So, the TCJA also effectively doubled said standard deduction.
What does this mean for employees?
Come Tax Day 2020, employees still cannot deduct unreimbursed business mileage, unless they meet certain criteria. That does not include most W-2 employees. Under Section 62, only artists, government officials and teachers qualify. While these employees can claim a mileage deduction for 2019, they will likely be using a different rate.
Should my company make changes to its vehicle program?
That depends on what kind of reimbursement your company offers. Do you use a Cents-per-mile reimbursement? You’ll likely be looking to change your rate, when the 2020 IRS business standard mileage rate is announced.
Have a car allowance? This would be a vehicle program you’d want to steer away from in the coming year. If it isn’t accountable, it’s taxable, for both you and your employee. What’s more, you may be under-reimbursing them, which could mean labor law violation.
There is an IRS preferred vehicle reimbursement program, and that’s the Fixed and Variable Rate Reimbursement (FAVR) program. Interested in learning why? You can find out more here.