How Does Mileage Reimbursement Work? Rules & Rates
Navigate the complexities of mileage reimbursement. Discover how to properly account for business vehicle use, from eligible travel to tax considerations.
Mileage reimbursement is a system designed to compensate individuals for the costs incurred when using their personal vehicles for business purposes. This arrangement acknowledges that operating a vehicle involves expenses beyond just fuel, encompassing wear and tear, maintenance, and insurance. For employers, it provides a structured way to cover legitimate business costs incurred by their workforce. For individuals, it ensures they are not financially disadvantaged by using their private assets for work-related travel.
Understanding Eligible Travel
Mileage reimbursement applies to travel undertaken for business objectives. Eligible trips include driving to client meetings, traveling between different work locations, or going to temporary work sites. For instance, an employee driving from their main office to a branch office or a temporary project site qualifies for reimbursement. Travel from a home office to another established place of business is also generally eligible.
Conversely, commuting from an individual’s home to their primary workplace is generally not considered eligible business travel. The IRS defines commuting as the cost of transportation between a home and a main or regular place of work, and these expenses are typically not deductible or reimbursable. While most employees are the primary recipients of mileage reimbursement, self-employed individuals can also account for business mileage as a deductible expense. Related expenses like tolls and parking fees incurred during business travel are also commonly reimbursable.
Methods for Calculating Reimbursement
Two primary methods exist for calculating mileage reimbursement: the standard mileage rate and the actual expense method. The standard mileage rate, a simplified approach set annually by the IRS, is 70 cents per mile for business use in 2025. This rate covers all fixed and variable vehicle operating costs, including fuel, oil, maintenance, repairs, insurance, and depreciation.
Alternatively, individuals can opt for the actual expense method, which involves tracking and deducting precise vehicle operation costs. This method allows for the inclusion of specific expenses such as gas, oil, repairs, tires, insurance premiums, registration fees, depreciation, and lease payments. While more complex due to detailed record-keeping, the actual expense method might be advantageous for those with higher vehicle operating costs, such as older vehicles or those with significant repair needs. The choice between these methods often depends on individual circumstances and preferred record-keeping.
Essential Documentation
Accurate and detailed record-keeping is fundamental for substantiating mileage reimbursement claims. A comprehensive mileage log is the primary document, requiring specific information for each business trip. This includes the date of travel, destination, business purpose, and total mileage covered.
Contemporaneous record-keeping, meaning logging information at or near the time of the trip, is recommended by the IRS. In addition to mileage logs, retaining receipts for all other vehicle-related expenses is important, particularly if using the actual expense method. This includes receipts for tolls and parking fees, often reimbursed separately from the per-mile rate. These detailed records provide the necessary evidence to support reimbursement requests or tax deductions.
Tax Implications
The tax treatment of mileage reimbursement varies depending on whether the individual is an employee or self-employed. For employees, reimbursement received under an “accountable plan” is generally not considered taxable income. An accountable plan requires expenses to have a business connection, adequate substantiation, and the return of any excess reimbursement within a reasonable timeframe. If an employer’s reimbursement plan does not meet these criteria, payments may be treated as taxable wages to the employee.
Self-employed individuals do not receive reimbursement but instead deduct their business mileage as an ordinary and necessary business expense directly on their tax returns, typically on Schedule C (Form 1040). This deduction reduces their taxable business income. For most employees, unreimbursed employee business expenses, including mileage, are not deductible for federal income tax purposes from 2018 through 2025 due to changes introduced by the Tax Cuts and Jobs Act.