Reflecting a drop in gas prices, the IRS’ standard mileage rate—which you may use to reimburse employees who drive their own cars on business—drops to 56¢ a mile for 2014, down from 56.5¢.
You can also use the standard mileage rate to value the taxable personal use of company vehicles that are first made available to employees this year, but only if those vehicles are moderately priced.
Warning: The IRS has yet to release the 2014 amounts, but for 2013, the amounts were $16,000 for cars and $17,000 for SUVs. (Notice 2013-80, IRB 2013-52)
A short ride in a fast machine. For employees who drive their own cars on business, the 56¢-per-mile rate is a ceiling; you may use a lower per-mile reimbursement rate. Reimbursements up to 56¢ per mile are tax-free, provided employees keep track of their business miles, where they drove, whom they saw and the business they conducted. Electronic expense reports and GPS devices or smartphones equipped with a mileage tracking app that are backed up to a server make this easier.
What’s taxable: reimbursements exceeding 56¢ per mile, amounts employees don’t return and amounts paid for miles for which employees don’t keep adequate records.
Example. Emily’s mileage allowance is 65¢ a mile. In May, she receives $325 for 500 business miles to be traveled that month. In June, she proves that 400 miles were traveled. She returns $65 for the 100 miles not traveled. The amount deemed accounted for, for the 400 miles, is $224 (400 × 56¢), and she doesn’t return the remaining $36. By the first pay period after the pay period in which the 400 miles are accounted for, her employer pays taxes on the $36 as wages.
License and registration, please. The standard mileage rate may be used to value employees’ personal use of company vehicles. But if a vehicle’s value exceeds the IRS’ limits, you must use the general valuation method or lease valuation method. First, subtract employees’ substantiated business miles from total miles. The next step depends on your valuation method.
Example. Ben drives a $31,000 company car. Using the annual lease value table for a $31,000 car, $8,250 is the taxable value. If he accounts for 25,000 business miles and 15,000 personal miles, the taxable amount of his personal use is 15,000 ÷ 40,000 = 0.375 × $8,250 = $3,093.75.