Does Mileage Reimbursement Cover Fuel Charges?

Your business is growing, and soon you’ll need to have employees drive their personal vehicles to meet clients outside of the office or attend to business matters in other parts of the city. You’ll need to have a vehicle expense policy in place before that happens. While you can reimburse your employees for mileage in personal vehicles in any manner you choose, most companies develop a system based loosely on the Internal Revenue Service’s guidelines for mileage and fuel reimbursements.

Many business owners transfer the IRS’ standard mileage deduction directly to their corporate mileage reimbursement policy. The standard mileage rate – 55.5 cents per mile for business use in 2012 – is designed to cover all operational costs incurred while operating a vehicle. This includes not just fuel costs, but also depreciation, the cost of routine maintenance, such as oil changes and brake jobs, and insurance costs. Mileage rates are intended to provide an easy means for vehicle owners to cover expenses without the hassle of extensive record keeping.

When an individual claims a mileage deduction – the tax equivalent of receiving a mileage reimbursement from an employer – she shortcuts the process of tracking and claiming vehicle expenses later. Additionally, an employer who claims mileage deductions on a company vehicle can’t claim other expenses from the vehicle, such as depreciation and fuel costs, as deductions. By claiming mileage, a driver forgoes claiming other vehicle-related expenses for the vehicle. Most employers use this system to reimburse workers for driving expenses.

The IRS requires that vehicle owners keep a log of the business miles they drive as they drive them. To do this, drivers should keep a log in their vehicle and record the odometer reading at the beginning and end of the trip, the trip’s dates and the starting and ending location of the business-related trip. Other recorded details should include a description of the purpose of the trip and the names of the clients or organization the trip was made to meet.

If you reimburse your employees for their mileage, reimbursement payments are not treated as income and you make the payments free and clear of any tax withholding or matching FICA contributions on your part. You may claim the reimbursement payment as a business expense. Only one taxpayer may claim business mileage as a deduction, however, so employees must waive their deduction if they receive a reimbursement from you.