Preface: The Journey of a thousand miles begin with one step – Lao Tzu
Mileage and Meals
Credit: Jacob M. Dietz, CPA
Do you or your employees drive personal vehicles for business purposes? Do you eat at restaurants for business purposes? If yes, then there may be tax benefits waiting for you.
Business travel is tax deductible. First, there are two general ways a business can deduct expenses for travel by vehicle. The first method is actual expenses. For example, suppose a construction company buys a new pickup truck used 100% for business. The cost of that pickup truck, as well as gas or diesel, repairs, maintenance, inspection etc. are all tax deductible either directly as expenses or as depreciation.
The second method is the mileage deduction. The IRS publishes a set rate at which miles can be deducted. For the second part of 2022, that rate is $.625. If a business owner decides not to take the actual expense deduction, they can deduct a mileage rate. The mileage rate can be an especially good option for a small business if the owner uses a vehicle primarily for personal use and only secondarily for business use.
The standard mileage deduction replaces certain actual expenses like car insurance, gasoline, repairs, registration fees, and depreciation. If you incur tolls (such as on the PA turnpike) or parking fees, those can still be deductible in addition to the standard mileage rate.
In IRS Publication 463, the IRS explains that in certain situations the mileage method is not allowed. For example, if you take bonus depreciation or 179 expense on a car, you are prohibited from then taking the mileage deduction. This helps prevent a business owner from getting a double benefit, both expenses and mileage.
Employee Mileage for Business?
What happens when an employee drives their personal vehicle for work? If the business has an accountable plan, then the employee can submit mileage logs for reimbursement to the business. The company can then reimburse the employee for their mileage at the IRS rate, which is currently $.625 per mile. The business can then deduct those mileage expenses for tax purposes, and the employee does not need to pick up that reimbursement as income.
If a business has employees driving their personal vehicle for work, then an accountable plan can be a tax-efficient way to reimburse the employee for that expense. Simply increasing the employees pay would not be as efficient, since the employee would then be subject to taxes on the increased pay and there could be increased payroll taxes. Note that the reimbursement should be for business miles, not commuting miles.
Taxpayers can often deduct 50% of the cost of a business meal, or 100% (for 2021 and 2022) of a business meal if it is from a restaurant. To deduct this meal, the taxpayer should be able to substantiate the expense.
Whether reporting your own business mileage or reporting mileage to an employer under an accountable plan, make sure that you substantiate the information. Simply taking a wild guess in April as to how many miles you drove for business last year may not hold much weight in an audit. Also, when reporting business meals, make sure you have adequate substantiation. If the meals and mileage are not substantiated, expect to have them thrown out in an audit. Remember to establish the business purpose of the expense, not just that the expense was incurred.
If you have employees traveling for business, consider using the per diem rules. Under the per diem rules an employer may deduct expenses paid to an employee at the federal per diem rate with less paper shuffling. The details of the per diem rules are beyond the scope of this blog. If you want to implement a per diem plan, please contact your accountant for more details. The per diem rules may make some things easier, but they do not eliminate all the recordkeeping.
This article is general in nature, and it does not contain legal advice. Contact your advisors to discuss your specific situation.