When someone says that business will take you places, they don’t typically mean it literally.
But in many cases, travel is an inevitable part of conducting business. When it needs to happen, you want to make sure you’re accurately capturing those costs and maximizing tax deductions.
Sometimes, travel means someone making use of a personal vehicle to get from point A to point B. No matter who it is in the organization, these costs have to be accounted for.
So how do you capture these costs accurately? You need a business mileage reimbursement policy. We have the information you need to make sure every cent is accounted for, maximizing your tax deduction and staying compliant with rules and regulations.
What is business mileage reimbursement?
Business mileage reimbursement is a program used by companies to compensate employees for the use of their personal vehicles for business purposes. The reimbursement is intended to cover the cost of fuel, insurance, and maintenance of the personal vehicle.
The reimbursement amounts paid out by the business are treated as if the car belonged to the business. This means they are tax deductible and recorded as auto expenses on the income statement.
Mileage reimbursement programs benefit businesses that do not have a dedicated fleet of vehicles. You don’t need to worry about a large capital purchase like a new vehicle and instead, your costs are proportional to your use.
How do you calculate mileage reimbursement?
There are three common methods for calculating mileage reimbursement.
Actual expense method
The actual expense calculation method involves employees logging every cost they incurred in the use of their vehicle for business purposes.
Using the actual expense method requires thorough record keeping and a keen attention to detail. Receipts must be kept with clear documentation that the expense was tied to business activity.
Standard mileage reimbursement rate
The standard mileage reimbursement rate approach mirrors the standard mileage rate introduced by the IRS to simplify and streamline tax reporting. It involves tracking total miles driven for business purposes and multiplying it by a set per-mile reimbursement amount.
Using a standard mileage reimbursement saves you time and reduces the amount of documentation required in your reporting. Rather than keeping individualized receipts, you rely on mileage reporting that’s completed by your employees.
Businesses set their mileage reimbursement rate, though many choose to use the standard mileage reimbursement rate set by the IRS (more on that later).
Fixed and variable rate (FAVR)
FAVR sets a fixed payout amount for any employees who use their vehicle for business purposes with a variable rate payout for each mile driven. It’s similar to the standard mileage reimbursement rate because of the per-mile variable rate.
Typically the per-mile rate is less than the IRS’s standard mileage reimbursement rate as some amount is baked into the fixed amount paid out.
As an example, an FAVR policy with a $100 fixed rate and $0.50 per-mile variable rate would pay out $150 to someone who drove 100 miles—$100 from the fixed rate and $50 (100 * $0.50) from the variable rate.
2024 standard mileage reimbursement rate
The 2024 standard mileage rate is set at $0.67 per mile driven for business purposes (up from $0.655 in 2023).
The Internal Revenue Service (IRS) sets the standard mileage rate every year with the announcement typically coming in December.
Occasionally, the rate will change part way through the year. For example, in 2022 the mileage rate jumped from $0.585 to $0.625, an increase of 4 cents.
If this happens, the change only applies to the portion of the year under the new regulations. In this case, business use of a personal vehicle was $0.585 per mile for January through June and $0.625 for July through December.
Federal mileage reimbursement laws
Federal mileage reimbursement laws are made by the IRS. They outline the different mileage reimbursement methods, reimbursement rates, necessary recordkeeping, and what is considered business activity.
For any compensation paid out to employees as a reimbursement, it must adhere to an “accountable plan.”
An accountable plan is a set of rules set up by the business. These rules define compensation as being a reimbursement if it covers costs that:
- Have a business connection
- Are substantiated by reporting and documentation (e.g. receipts, mileage logs)
- Are not in excess of the actual costs incurred by the employee (with any excess being returned)
For standard mileage reimbursements, this means employees must fill out a mileage log that outlines the purpose of the trip and the exact amount of miles driven. This defines the business connection and the actual costs of the trip.
To get accurate mileage logs, consider using an app like MileIQ or Everlance which automates the tracking process. BILL Spend & Expense also makes mileage reimbursement easy by automatically filling in routes from Google Maps or manually entering miles driven all within our mobile app.
All reimbursed costs are recorded as expenses on the income statement, not as salaries and wages. They are tax-deductible depending on how they are categorized (business use of a car is 100% tax-deductible).
How to manage a business mileage reimbursement policy
Your business mileage reimbursement policy should mirror your expense reimbursement policy. After all, the purpose of the reimbursement is to cover expenses related to running and maintaining the vehicle.
The essential parts of a business mileage reimbursement policy are:
- The reimbursement methodology being used:
- If you’re using the standard mileage reimbursement, define the per-mile rate
- If you’re using the actual cost method, define what costs can be included and the process for proving those costs to be related to business activity
- If you’re using the FAVR method, define the fixed payout and the per-mile variable rate
- The documentation required when submitting reimbursements
- The reporting process and deadlines for submission
- A pre-approval process in determining whether business use of a personal vehicle is valid
- The steps for filing a dispute if a reimbursement is disapproved
It’s not often that a business drafts the perfect business mileage reimbursement policy on the first attempt. Have regular touchpoints with your finance team and employees to identify pain points or aspects of the process that could be improved and get to a policy that works for you.
Policy tips
A business mileage reimbursement policy needs to be clearly documented and communicated to your employees. Once it’s drafted and approved, keep it in a central location where it’s accessible for review.
To have the best possible business mileage reimbursement policy, follow these best practices:
- Define what travel is eligible: Employees travel for a large array of reasons; to avoid over-reimbursing, you must clearly define what types of travel can be included in a mileage report
- Set the reimbursement rate: Determine whether you’ll use the actual expense, standard reimbursement, or FAVR method; set the per-mile rate for the standard reimbursement method and the variable and fixed components of the FAVR method
- Determine the recordkeeping requirements: Communicate what information the employee needs to provide (e.g. date of the trip, mileage traveled, the purpose of the trip) to have their mileage successfully reimbursed
- Outline the submission process: Define the dates the employee must submit reports on, the reports to be provided, and the approval process once the report is submitted
- Have a regular review and update schedule: Set timelines on which you’ll review how the policy is performing and update it accordingly
- Use automation when possible: Leverage technology to minimize the manual aspects of the process including mileage tracking apps and reimbursement software with automatic error checks
Reimbursement methods
The core component of your business mileage reimbursement policy is your reimbursement method.
Which reimbursement method is right for you? The short answer is it depends.
The actual expense method will be the most accurate at capturing the costs of an employee using a personal vehicle for business purposes. But the trade-off is the amount of administrative work required to stay on top of all eligible expenses.
You’re not guaranteed to spend any more or less when using the standard reimbursement method, but you’ll at least save time on the admin work required for reimbursing employees. The same can be said for FAVR which similarly operates on a per-mile rate.
If you choose the standard reimbursement method, you set the per-mile amount employees are reimbursed. It’s common for businesses to choose the standard mileage reimbursement used by the IRS, but you have the freedom to select any amount.
Remember that what you reimburse has its trade-offs. The more you reimburse, the more you’ll accrue in tax deductions but at the cost of your profits as reported on the income statement.
Track and pay reimbursements with ease
BILL Spend & Expense has all the tools your employees need to track mileage and submit reimbursement reports with ease.
With options to automatically track miles or manually calculate distances all from the mobile app, your employees have options to quickly and conveniently submit reports that are automatically passed on to your finance team.
Make reimbursements easy for every member of your team with a convenient platform that works just as well on the go as it does in the office.
FAQ
What is the federal mileage reimbursement rate
The federal mileage reimbursement rate is what the IRS offers to taxpayers to simplify the reporting of vehicle-related expenses when using a personal vehicle for business purposes.
It’s most commonly used by self-employed individuals. Rather than itemizing every expense that’s related to business use of their vehicle, they simply track their miles traveled for business purposes and multiply it by a standardized rate.
In 2024, this rate is $0.625. This means that if someone uses their personal vehicle to travel 1,000 miles for business purposes, they could report $625 in tax-deductible expenses.
What is FAVR?
FAVR stands for fixed and variable rate. Fixed and variable rate reimbursement programs have two components:
- A fixed rate that is paid out to anyone using a personal vehicle for business purposes
- A variable rate that increases the reimbursement amount for each mile traveled
For example, a business could run an FAVR mileage reimbursement program that has a fixed component of $100 and a variable rate of $0.50 per mile traveled.
An employee who uses their personal vehicle for business purposes is guaranteed $100 from the fixed rate portion. Over the course of the reporting period, they used their vehicle to travel 100 miles for business purposes.
The variable rate component is $50 (100 * $0.50) bringing their total reimbursement amount to $150.
Do employers have to pay mileage reimbursement to employees?
Federal laws state employers are not required to pay mileage reimbursement to employees. In these cases, it should be documented in the employment contract.
However, some states have made mileage reimbursements mandatory. California, Illinois, and Massachusetts all have laws that state employers must reimburse employees for business-related mileage, though the methodology is not written into law.
