Understanding Mileage Reimbursement in 2020
Good morning, Ladies and Gentlemen. Welcome to the People Processes podcast, where we dive deep into the tools, laws and yes processes that you need to know in order to scale and grow your organization. My name is Rhamy Alejeal, I’m the CEO of People Processes. We help organizations all across the USA streamline, optimize, implement, and revolutionize their HR operations. We’ve helped hundreds of companies across the U S ,thousands of HR leaders across the world get their people processes right.
Today, we’re going to be diving into the Tax-Free Mileage Reimbursement Stuff for 2020. It’s a little dry stick with me. It’s kind of interesting. We’re going to be covering the changes that came up here in 2020, make sure you’re all set to go forward. In the meantime though, before we dive to date, please subscribe to the podcast. You can find us on iTunes, Google podcasts, Spotify, Stitcher, any podcatcher you like. You can also subscribe at peopleprocesses.com, which will put you on our email list and send you subscriber only content. I look forward to seeing you on one of those.
Now let’s talk about this. The IRS has announced that the standard mileage rate for 2020 is 57.5 cents per mile. That’s down from 58 cents per mile for 2019. If your company reimburses employees for business use of employees’ own cars, the expenses are deemed substantial in 2020 as long as it does not exceed 57.5 cents per business mile, regardless of the employee’s actual cost. I said substantial. It’s substantiated. A reimbursement is free of employment taxes as long as the employee provides your company with a record of the time, place, business purpose, and number of miles traveled. The employee is not required to provide a record of actual expenses or receipts. Instead, they provide you a log and as long as you are paying at 57.5 cents, you’re good.
However, if you give more than this year, let’s say you didn’t update your payroll, now you’re paying 58 cents. You do not. You have to actually produce a supporting record of actual expenses. The excess under beyond that is treated as a “non-accountable plan” and it actually gets taxed as wages. On the other hand, you’re not required to pay the 57.5 cents. If you go the standard route, expenses are deemed substantiated as long as the employee reimbursement rate does not exceed 57.5 so you could do 50, you can do 45, but you can’t do more than 57.5 unless you’re actually accounting for every penny of the employees. Depreciation on their vehicle mileage, your share of their oil changes, it’s a very complex reminder. In the past, the business standard mileage rate could be used by an employees to claim a miscellaneous itemized deduction (subject to a 2% deduction floor) for unreimbursed business travel expenses. So if you didn’t reimburse them, they used to be able to write this off themselves.
However, the 2017 Tax Cut and Jobs Act (TCGA), suspended such miscellaneous itemized deductions for 2018 through 2025, that’s I.R.C. Section 67, link on our website at peopleprocesses.com if you want to read about it. Therefore, the business standard mileage rate cannot be used to claim a deduction for unreimbursed employee travel expenses.
Similarly, under prior law, an employee could claim a miscellaneous itemized deduction for the amount by which his or her actual expenses for driving exceeded the amount reimbursed by an employer, as well as for expenses such as parking and tolls that were not covered by an employer-provided mileage allowance. These deductions are also disallowed in any year during the suspension period 2018 to 2025. So if you don’t reimburse your employees for mileage used to be, they could write it off on their taxes. Now they can’t. Okay. So if you reimburse, it needs to be under 57.5. If you don’t reimburse, you’re kind of screwing your employees. This is a great way to send them some tax-free money.
There are other ways of doing this. This also talks about, what’s called a fixed and variable rate (FAVR). This is a favour allowance. This includes a cents-per-mile rate to cover the variable costs (such as gasoline) and a flat amount to cover fixed operating expenses (such as depreciation and insurance). The amount of a FAVR allowance must be based on data that is reasonable in approximating the actual expenses for the purposes of computing the allowance under our fabric plan. The standard automobile cost may not exceed $50,400 for automobiles (including trucks and vans) for 2020, so if you go that route, you probably need a little bit of help figuring that stuff out a little more in depth than what we want to cover in this podcast.
There’s another thing to think about. In 2020 the standard mileage rate for medical and moving expenses is 17 cents per mile, which is down 3 cents from 2019. So when you were reimbursing employees for moving expenses, you probably used 20 cents. Now it’s down to 17 the standard mileage rate for trips connected with charitable activities is set by statute and remains at 14 cents per mile for 2020. So if you’re reimbursing employees for traveling to a charitable event, it’s 14 cents, same as last year.
Another reminder, the TCGA changed that too. Under the prior law, taxpayers could deduct moving expenses of a job-related move. In addition, an employer’s reimbursements or payments for job-related moves were tax-free to the employee and deductible by the employer. The Tax Cut and Jobs Act suspends deductions and income exclusions for moving expenses for tax years 2018 through 2025. The only exception is members of the armed forces. So you, instead, deductions or reimbursements for mileage in connection with such moves, you would use that standard mileage rate that we were talking about that 17 cents and it would be employer paid. If you don’t do it, the employee can’t write it off.
There’s a new IRS Revenue Procedure on this. It’s linked on our website for a complete discussion of the new guidance. It’s “IRS Updates Rules of the Road for Standard Mileage Rates Reimbursements.” Payroll Manager’s Letter came out December 21st of 2019. This is a lot of information. If you do mileage reimbursements, let’s recap. It’s gone down by a half a cent. If you move, it’s gone down by 3 cents. And if you don’t do either, unlike last year, well, unlike prior years, your employees are no longer able to claim those as deductions. So if you don’t reimburse it, they’re just out of luck.
Ladies and Gentlemen, that’s it for today. Just a quick compliance update. Hope you learned something. Hope you had a good time. Reach out to us on our social media, Twitter, Facebook, LinkedIn, Instagram, wherever you want to find us. Ask us questions. We’d love to help. Thank you for tuning in. Again, my name is Rhamy Alejeal, and I appreciate you coming out. Time for you to go out there, have a great day, and get your work done.
Reference links here: I.R.C. §67, I.R.C. §170(i)
About the author, Rhamy
Rhamy grew up watching and working with his mother and grandmother in the senior insurance market. This familiarity with the struggles faced by people trying to navigate the incredibly complicated and heavily regulated healthcare market led him to start Poplar Financial while working on his degree at the University of Memphis. After completing his MBA and Bachelors in Finance and Economics, Rhamy guided Poplar Financial through the disruptive opportunity that is the Affordable Care Act. Since then Poplar Financial has received numerous awards from major insurance carriers and has completed its fourth year in a row of doubling in size. Now his team focuses on the processes around human resources and specializes in providing companies with between 20 and 1000 employees with the payroll, benefits, and HR needs.