Every year millions of Americans use their personal vehicles to travel for business purposes. There are a variety of reasons employees use personal vehicles for business. Whether it’s to make a sales call or pick-up office supplies, these trips are vital to your organization’s operations. Keep reading to learn the new standard mileage rate and everything else you need to know regarding employee vehicle use for 2019.
New Standard Mileage Rate
In late December 2018, the IRS announced an increase in the standard rate employers should use to calculate deductible expenses for operating company cars and trucks in 2019, through Notice 2019-02. Businesses can use this standard rate, called the safe harbor rate, to pay tax-free reimbursements to employees who use their own vehicles for business.
For 2019, standard mileage rates for the use of cars, vans, pickups, or panel trucks is:
- 58 cents per mile driven for business use (Up from 54.5 cents in 2018)
- 20 cents per mile driven for medical or moving purposes (Up from 18 cents last year)
- 14 cents per mile driven in service of charitable organizations (Unchanged from 2018)
Additionally, Notice 2019-02 increased the portion of the standard mileage rate that is treated as depreciation for cars a taxpayer uses for business. The new part of the rate treated as depreciation is 26 cents per mile for 2019. This rate marks an increase from 25 cents per mile in 2018.
It’s vital that any business owner or manager knows these new reimbursement rates. Under-reimbursement may upset, annoy, or anger your staff. And these under-reimbursements may result in actual lawsuits.
Other Reimbursement Methods
It’s important to note organizations can choose to calculate the actual costs of using vehicles rather than using the standard mileage rate. Notice 2019-02 established the method employers can use to calculate these actual costs, called the Fixed and Variable Rate (FAVR) allowance plan.
Through a FAVR plan, employees who use their own vehicles can receive tax-free reimbursements from their employers for fixed and variable vehicle expenses. Examples of fixed costs include insurance, taxes, and registration fees. Examples of variable expenses include fuel, tires, and routine maintenance and repairs.
Under a FAVR plan, the cost of an employee’s vehicle may not exceed the maximum amount, which is set by the IRS every year. For 2019, vehicle costs may not exceed $54,000 for automobiles, trucks, and vans. This total is an increase from 2018 when expenses were capped at $27,000 for automobiles and $31,000 for trucks and vans.
The FAVR allowance plan, in locations with higher automobile operating costs, may be more than the standard mileage rate. Still, employers must weigh this potential advantage against the fact that employers must recalculate the FAVR allowance at least once every month. Because payments to employees, under a FAVR plan, must be made at least quarterly.
There is one other method for organizations to compensate employees for using personal vehicles for business. Employers can use a flat car allowance, a set amount provided to employees over a given period, to cover the business-driving expenses of their staff.
Flat car allowances make reimbursements simple to administer. Still, these payments are taxable to employees unless handled within an “accountable plan.” These plans require substantiation and the return of excess amounts in a reasonable time.
No Personal Deductions
The reach of last year’s tax reform formally called the Tax Cuts and Jobs Act (TCJA), extended beyond creating a new set of tax brackets. According to the TCJA, “taxpayers can no longer claim a miscellaneous itemized deduction for unreimbursed employee travel expenses.”
In the past, employees who weren’t reimbursed for business driving costs could deduct these expenses from their taxable income. Employees could deduct these costs along with other work-related unreimbursed expenses. But, it’s important to know these expenses have to total more than 2 percent of the individual’s gross income.
Essentially, employees who logged significant mileage on their vehicles but didn’t get reimbursed by their employer could potentially get a deduction for said mileage expenses on their personal taxes.
So, which reimbursement method should your business use? Well, as with most answers, it depends. For low-mileage drivers, a flat car allowance or the standard mileage rate is likely the best course of action. A FAVR allowance plan, on the other hand, works better for higher-mileage drivers. These plans allow you to more accurately and fairly reimburse staff for the exact cost of their work-related driving.