Buckle up, because the Internal Revenue Service (IRS) has outlined the new standard mileage rates for 2020. Don’t get too excited, though, because the changes are a minimal decrease after the significant increases in 2019.
Each year, the IRS reevaluates the optional standard rates that taxpayers can use as part of the calculation to write off mileage for certain purposes. The evaluation process takes into account a slew of variables, including extenuating circumstances that affect the cost of gasoline. While the law does not require employers to use the standard rates, they are in place to help calculate expenses more efficiently, and to ensure that workers are reimbursed fairly.
So, let’s learn more about ways employees can claim mileage, along with the new rates for 2020.
The Standard Mileage Rate
Often referred to as SMR, the standard mileage rate is the amount per mile that the IRS allows taxpayers to use when calculating vehicle expenses for the purpose of tax deductions. Another way businesses can deduct their mileage expenses is by keeping record of gas, maintenance and repairs, insurance, and fees for license and registration. Maintaining records for these expenses can be tedious, though, and therefore many businesses opt for the SMR instead. Also, a bonus of calculating deductions using the SMR is that it has vehicle depreciation already built in.
Business Mileage Deductions
Prior to 2018, getting reimbursed for mileage was a bit different than it is now. One thing remains the same, however. Namely, employees were often required to drive a vehicle in multiple capacities while working for a company. In fact, some employees did not have to drive as part of their normal job description, but urgent errands for unusual circumstances required them to do so. For example, a customer service representative might have been asked to run and grab lunch for an unexpected client visit. In that kind of situation, the employee would keep track of the miles he drove, and deduct them as an expense in when filing taxes at the end of the year. That was considered to be an unreimbursed employee business expense, and the employee would claim the expense as an itemized deduction under Sec. 67.
However, a new law went into effect, suspending the miscellaneous itemized deduction. So, from 2018-2025 the Tax Cuts and Jobs Act (TCJA), PL. 115-97 prohibits employees from claiming mileage deductions for unreimbursed expenses incurred on the job.
Taking this into consideration, what can employees do to make certain they are not getting the short end of the stick when driving for work-related purposes? Well, they can submit the mileage for reimbursement from their company. While it is not a law that employers must reimburse mileage, many will since it is a good way to keep employees. Furthermore, mileage reimbursements calculated using the standard rates are not considered income, and therefore are not taxable as wages.
So, if you are an employer who reimburses employees for miles driven, consider making it easier on employees by creating a streamlined way of tracking and recording mileage.
Mileage Deductions for the Self-Employed
Now, the aforementioned situations pertain to employees of a company. However, this differs in the case of those who are self-employed. In other words, self-employed taxpayers may deduct vehicle expenses when the expenses qualify as ordinary and necessary for business purposes.
So, those who are self-employed must decide whether they will deduct expenses using the standard mileage rate, or if they will keep track of the actual cost of expenses, which is called the straight-line method. Furthermore, if they sell a vehicle that has been using the SMR, they will need to asses for taxable gains made through the sale. If so, they must consequently adjust the tax basis of the vehicle for each SMR-applicable year.
Ways Mileage May Be Reimbursable or Deductible
Besides this way, there are other situations that would warrant a mileage reimbursement. Here are a couple ways employees can claim mileage:
- First , it is important to note that driving to and from work is not eligible for mileage reimbursement. This is considered commuting. However, if your employer requires you to drive from one business location to another, your mileage might be deductible.
- Second, if your employer assigns you to temporary work, then the mileage travelled may be deductible.
While running errands for work is no longer an eligible deduction through taxes, do remember to ask your employer about a reimbursement.
Standard Mileage Rates for 2020
The new optional standard mileage rates, which went into effect on January 1, are broken into the following three categories:
- Business Mileage – 57.5 cents per mile (which is a decrease of .5 cents per mile in 2019)
- Medical or Moving Mileage – 17 cents per mile (which is a decrease of 3 cents per mile in 2019)
- Charitable Mileage – 14 cents per mile (which remains the same since 2019, as the rate is currently fixed by congress)
Now, these mileage rates are standard for miles driven in a car, van, pickup, or panel truck.
It’s important to note that the IRS restricts using the SMR in certain situations. Three such situations are as follows:
- Fleets – If a business uses multiple vehicles at once, the SMR is not permitted. However, it is allowed if they own at least two vehicles that aren’t being used at the same time.
- Rural Mail Carriers – Since these businesses already collect a qualified reimbursement, they cannot receive double dip and receive a reimbursement at the standard mileage rate.
- Taxis – Businesses that operate a vehicles for hire, and charge mileage in part of the normal operations, may not deduct the miles at the standard rate.
Furthermore, small businesses must implement the SMR for vehicles in the first year of service for the vehicle. This, however, does not mean they must continue this way forever. After the first year, the business may switch to calculating the actual cost thereafter. Nevertheless, be aware that calculating the actual cost does typically result in a smaller deduction. So, businesses should choose wisely when deciding which method of calculation to use, because they cannot be used at the same time.
Pennies Add Up
Whether you are driving miles for a reimbursement or a deduction, keep in mind that short trips do add up. So don’t forego logging your mileage because you think it will only amount to pennies. Instead, be diligent about recording each trip, because you will probably be surprised at the end of the year when you reconcile your books.
When in doubt, it is always a good idea to check with your accountant to be certain of the tax laws for the year.
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This is not meant to provide legal counsel or advice. Every situation is different. Please contact an HR professional or employment attorney before taking any action.
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