The IRS has issued new guidance regarding the rules for using standard mileage rates when calculating "above-the-line" deductions for specific automobile operating costs. This new guidance also lays out rules — IRS Revenue Procedure 2019-46 — for establishing reimbursement of employee transportation expenses using the optional standard mileage rates.
The Tax Cuts and Jobs Act (TCJA) temporarily suspended all miscellaneous itemized deductions that are subject to the 2% floor until 2026. Most employees' miscellaneous itemized deductions for unreimbursed business expenses are applied with the suspension, including automobile operating costs for business and unreimbursed travel costs.
During the suspension, self-employed individuals and qualified employees (including Armed Forces reservists, qualifying state or local government officials, educators and performing artists) are still allowed to deduct unreimbursed expenses. However, the suspension doesn't preempt the deductions because these taxpayers can claim the expenses "above the line," or when computing their adjusted gross income (AGI), rather than as itemized, below-the-line deductions. The guidance provides rules for how to do so.
Business Standard Rate
For automobiles utilized in business, taxpayers can usually deduct an amount equal to either:
- The business standard mileage rate (for 2019, 58 cents) multiplied by the number of business miles traveled, or
- The actual fixed and variable costs paid that are attributable to traveling those business miles
Instead of using the actual fixed and variable costs when computing AGI, the new guidance suggests that eligible taxpayers use the business standard mileage, subject to certain limitations. For example, you cannot use the business rate for fleet operations of five or more automobiles.
However, if you opt to use the business rate, you cannot also deduct your costs for items such as depreciation or lease payments, maintenance and repairs, tires, gasoline (including all taxes), oil, insurance, and license and registration fees.
You can, however, deduct parking fees and tolls attributable to business use above the line. You also can deduct interest on the automobile purchase, and related state and local taxes under certain circumstances. If the automobile isn’t used solely for business purposes, these expenses must be allocated accordingly.
For depreciation, taxpayers are required to reduce the basis of an automobile used in business by the greater amount of depreciation claimed or allowable. In any year during which you use the business standard mileage rate, a specific per-mile amount (published annually by the IRS) is treated as both the depreciation claimed and the depreciation allowable under the guidance.
The guidance allows taxpayers with deductible unreimbursed travel expenses to use the business standard mileage rate when calculating their AGI.
Transportation Expenses Documented
The new guidance includes rules for documenting — or "substantiating" — the amount of an employee's reimbursed ordinary and necessary transportation expenses using a mileage allowance.
An employee will satisfy the substantiation requirements if he or she confirms with the reimbursing party the expense time, place (or use) and business purposes according to the guidance. Because the reimbursing party pays a mileage allowance instead of returning the actual transportation expenses (subject to certain limitations), the amount is considered substantiated.
Under the revenue procedure, self-employed individuals and qualified employees aren’t required to include the portion of a mileage allowance in gross income, if it is less than or equal to the amount deemed substantiated. Plans that comply with IRS requirements for reimbursing workers, assuming other requirements for accountable plans are met, mean that portion of the allowance isn't reported as wages or other compensation, and is exempt from employer tax withholding and payment.
However, the allowance portion that exceeds the substantiated amount must be included in gross income, and is treated as paid under a nonaccountable plan. Such amounts are reported as wages or other compensation and subject to employment tax withholding and payments as a result.
Taxpayers aren't required to use the method described in the guidance to establish their reimbursed transportation expenses. Instead, if you maintain adequate records or other sufficient evidence, you can choose to substantiate your actual expense amounts.
The guidance rules state that employees must return allowance payments exceeding substantiated amounts. If an employer’s advance mileage allowance anticipates more miles than the employee substantiates, that employee must return a certain portion of the excess, depending on the type of allowance.
Guidance on computing fixed and variable rate (FAVR) allowances to establish an employee's automobile expenses is also included on the revenue procedure. A mileage allowance that uses a flat rate or stated schedule, and that combines periodic fixed payments (for items such as depreciation or lease payments, insurance, registration and license fees and personal property taxes) and vehicle rate payments (for items such as gasoline and all related taxes, oil, tires, and routine maintenance and repairs) is an FAVR.
Employers must base the amount of a FAVR allowance on data that's derived from the relevant geographic area and reflects retail prices. The data must be reasonable and statistically defensible when approximating the actual expenses an employee would incur as owner of the “standard automobile” (the automobile the payer selects to use as the basis for a specific FAVR allowance).
The guidance states that the standard automobile cost for a calendar year cannot exceed 95% of the sum of the standard area auto retail dealer invoice cost, or state and local sales use taxes. The IRS publishes the maximum standard auto cost annually. The business use percentage determination, allowance limitations, and the payer's recordkeeping and reporting obligations are addressed in the guidance.
The new IRS guidance is effective for deductible transportation expenses paid or incurred, and mileage allowances or reimbursements paid, on or after November 14, 2019. In addition to business driving expenses, it also addresses the deductible costs of operating a vehicle for charitable, medical or moving purposes. If you have questions regarding mileage-rated deductions, contact a Weaver professional today.
This year, the optional standard mileage rate used to calculate the deductible costs of operating an…