2024 IRS Tax Rules for Vehicle Reimbursement: FAVR, Allowance.

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Introduction

For companies that have employees who regularly drive for work, it’s common practice to offer mileage reimbursements. Since employees are using their personal cars for work — and incurring expenses as a result — mileage reimbursements are a way to compensate them for these costs. Maybe a salesperson driving from the office to a client meeting, or an assistant driving from the office for a work-related errand — there are plenty of scenarios where your employees could need to drive for valid work purposes in their personal vehicles.

Read on to find out more about the different options for reimbursing your employees for business mileage in 2024, and the associated tax implications according to the IRS.

Understanding Mileage Reimbursement

Mileage reimbursement is a way that employers reimburse employees for using their personal vehicles for work purposes. Mileage reimbursements can be tax-free when they follow IRS rules, and when they can be properly verified through detailed recordkeeping of business mileage and expenses.

There are three main reimbursement programs that offer the possibility of tax-free reimbursement: Fixed and Variable Rate (FAVR) programs, Cents per Mile programs, and accountable allowances. Accountable allowances typically offer a monthly sum like $600 to employees, while a Cents per Mile program offers, you guessed it, a number of cents per mile, for example $0.60 per mile. FAVR programs offer reimbursement for both fixed and variable costs of using a personal car for business, including expenses like insurance, gas, depreciation, and more. FAVR program reimbursements are typically considered to be a more accurate representation of actual business expenses.

IRS Tax Rules for FAVR Programs

In a Fixed and Variable Rate (FAVR) reimbursement program, employees are reimbursed for a range of expenses. This robust program is designed to reimburse for variable expenses like gas and maintenance, as well as fixed expenses like insurance payments, depreciation, and more.

When FAVR programs are compliant with IRS rules, these reimbursements can be entirely tax-free — benefitting both employees and employers. For businesses running a FAVR program in 2024, it’s important to be aware of the rules surrounding FAVR programs, such as that drivers must drive at least 5000 business miles per year to be eligible, as well as other requirements surrounding the cost and age of the driver’s vehicle.

To be compliant, drivers must also keep detailed records of all business mileage as per IRS guidelines, as well as business expenses. This includes keeping mileage logs with information such as trip date, length, purpose, destination, and more. It’s also important to clearly separate business mileage from personal mileage. When all of the rules surrounding FAVR programs are followed, reimbursements are able to be tax-free.

A key part of compliance is staying up-to-date on all of the rules and the evolving landscape of vehicle reimbursement. For companies running a FAVR program, it’s important to know the IRS rules for FAVR programs, as of 2019.

IRS Tax Rules for Cents per Mile Programs

In a Cents per Mile program, employee drivers are reimbursed for a set amount for each business mile driven. The IRS sets a standard rate on a regular basis that’s used to determine how much tax-free reimbursement can be provided with a Cents per Mile program. The standard rate is the maximum amount that can be offered tax-free to employees for business use of their personal vehicle. While employers can choose to reimburse their employees at a higher rate than the IRS standard rate, the delta of the two rates will be subject to tax.

As with FAVR programs and accountable allowances, keeping detailed records of all business mileage is essential with a Cents per Mile program. These records serve to justify that business mileage was valid and back up any claims to the IRS.

For 2024, it’s important to be aware of the new IRS standard rate that’s effective as of January 1, 2024 of 67 cents per mile for valid business driving.

IRS Tax Rules for Accountable Allowances

In an accountable allowance program, employees are given a monthly allowance to reimburse for work-related expenses of using a personal vehicle. As with other accountable vehicle reimbursement programs, an accountable allowance uses the IRS standard rate as a benchmark for calculating tax-free reimbursements. When reimbursements fall within the parameters of the standard rate, they can be provided tax-free to employees.

The rules for accountable allowances are governed by IRS Publication 463, which include that all expenses must have a valid business connection, that mileage logs must be provided to the employer within a reasonable time frame, and that excess reimbursement funds that are unused must be returned to the employer at the end of the monthly allowance period.

When determining taxation on an accountable allowance, the sum of the allowance must be compared to the IRS standard rate to determine taxability. You divide the sum of the allowance by the miles a driver covered in a month, and deduct whatever is below the IRS threshold. So for example:

Example one:

A driver gets a $670 allowance.
In one month they drive 1000 miles.
Their per-mile allowance is $0.67.
This is the IRS standard rate, so they pay no tax.

Example two:

A driver gets a $1000 allowance.
In one month they drive 1000 miles.
Their per-mile allowance is $1.00.
This is above the IRS standard rate of $0.67 per mile, so they must pay tax on the delta, $0.33 per mile, or $330 dollars that month.

What’s the Best Vehicle Reimbursement Program?

The right vehicle reimbursement program for one business might not be the right fit for another. As companies each have their own sets of needs and goals, there isn’t a one-size-fits-all when it comes to vehicle reimbursement programs.

It’s a good idea to take a thorough look at your organization’s employee driving situation, so you can strategically consider each vehicle reimbursement program to find out what’s best for your business. Whether you go with a FAVR program, a Cents per Mile program, or an accountable allowance, each one offers the possibility of tax-free reimbursement—provided that you’re compliant with the associated IRS rules and guidelines. While there is more management involved in accountable programs like these, they come with a huge advantage of tax savings that can be enormously beneficial both to your employees and to your business.

When comparing vehicle reimbursement programs, it’s worth noting that FAVR programs are generally considered to be the more robust option. As it reimburses for both fixed and variable expenses, a FAVR reimbursement may be a more accurate and genuine representation of actual business expenses incurred. Additionally, FAVR programs are location-specific, allowing them to often be a better fit for organizations with employees located in different regions in the United States.

In turn, a Cents per Mile program may be a better fit for organizations whose employees drive infrequently. Ultimately, the best vehicle reimbursement program depends on your organization’s unique needs and goals.

Lastly, accountable allowance programs may be best suited to companies who want a FAVR-like program but with one simple test rule, that is, comparing it to the IRS standard rate, rather than the qualification-based FAVR system.

No matter the company, however, there exists some program that will benefit their vehicle operations for their field teams. It is just a matter of consulting an expert to discover what variation fits best.

Conclusion

When compliant with the relevant legislation and rules, mileage reimbursement can be paid out tax-free, benefitting both employees that have to drive for work and employers. In any program that allows for tax-free reimbursement — whether that’s an accountable allowance, a FAVR program, or a Cents per Mile program — keeping detailed records of business mileage and expenses is crucial for compliance. These records help demonstrate the legitimacy of business expenses to the IRS.

It’s key for employees and employers to be aware of any changes to IRS rules for these accountable programs. This helps make sure that their vehicle reimbursement program stays compliant, and helps also to ensure that reimbursements can be paid out tax-free — a strong advantage of an effective and accountable vehicle reimbursement program.

Sources

^{Disclaimer: Nothing in this article is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants nor agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.}

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