Mileage reimbursement compensates employees for using a personal vehicle for business-related travel. This ensures employees are not burdened by costs incurred while performing duties for their employer. The Internal Revenue Service (IRS) establishes a Standard Mileage Rate (SMR) annually, which is the most common method for calculating this reimbursement. This rate simplifies the process by providing a single, predetermined amount per mile that covers all operational expenses associated with business driving.
The Standard Mileage Rate Covers More Than Just Fuel
The simple answer to whether mileage reimbursement covers gas is yes, but the compensation is far more encompassing than just fuel costs. The IRS Standard Mileage Rate is an all-inclusive figure established to cover the total cost of operating a vehicle for business purposes. The rate is calculated based on an annual study that evaluates the costs of owning and operating an automobile. For 2025, the business rate is set at 70 cents per mile.
This single per-mile figure is a proxy for all expenses associated with business use, combining both variable costs (which change with driving) and fixed costs (which remain constant). Companies use this rate to provide a non-taxable reimbursement to their employees, provided specific substantiation requirements are met.
Detailed Breakdown of Costs Included in the Rate
The business Standard Mileage Rate is composed of two distinct categories of expenses: variable and fixed costs. Variable costs, which fluctuate depending on the distance driven, include operational expenses like gasoline, oil, routine maintenance, and repairs (such as tire replacement and brake service).
Fixed costs represent the expenses associated with vehicle ownership that do not change based on mileage. The largest fixed component is depreciation, which accounts for the gradual loss in the car’s value over time. Other fixed costs included in the rate are insurance premiums, vehicle registration fees, and license costs. The Standard Mileage Rate does not cover parking fees and tolls, which must be reimbursed separately.
Requirements for Tracking and Claiming Mileage
To properly claim mileage reimbursement, an employee must maintain a detailed and compliant mileage log. The IRS requires that this log be kept contemporaneously, meaning at or near the time of the business travel. This is required for the reimbursement to be considered non-taxable income.
A compliant mileage log must contain several specific pieces of information for every business trip:
- The date of the travel.
- The destination or starting and ending points.
- The total miles driven for that specific trip.
- The business purpose for the travel.
Employers must verify these logs to ensure the business connection and accuracy of the claimed miles. Accurate record-keeping, including an annual odometer reading, is necessary to prevent the reimbursement from being reclassified as taxable income.
Standard Rate Versus Actual Expenses Method
The Standard Mileage Rate is the most common method for calculating business vehicle costs due to its simplicity, but an alternative exists: the Actual Expenses method. This method requires the taxpayer to track and total every single expense related to the vehicle’s operation throughout the year. The actual expenses method is considerably more complex and requires significantly more record-keeping.
Under the Actual Expenses method, the employee must keep receipts for all expenditures, including every tank of gas, oil change, tire purchase, and repair bill. They must also document fixed costs like insurance, registration, and the vehicle’s depreciation. A business-use percentage is then calculated by dividing the business miles by the total miles driven, and this percentage is applied to the total operating costs to determine the reimbursable amount.
This alternative calculation may be more beneficial if a vehicle is expensive to operate, such as a large truck or a luxury car. However, a taxpayer who chooses the Standard Mileage Rate in the first year a car is used for business can switch between the two methods in later years. For a leased vehicle, the Standard Mileage Rate must be used for the entire lease period if chosen initially.
Tax Implications of Mileage Reimbursement
The tax treatment of mileage reimbursement depends on whether the employer follows an “accountable plan” as defined by the IRS. Under an accountable plan, reimbursements paid to the employee up to the Standard Mileage Rate are not considered taxable income. To qualify, the plan must require:
- A business connection for the expense.
- Adequate substantiation (the mileage log).
- The return of any excess reimbursement within a reasonable time.
If an employer’s reimbursement process does not meet all three of these requirements, it is classified as a “non-accountable plan.” Any payments made under a non-accountable plan are treated as taxable wages, which are included in the employee’s gross income on their Form W-2 and are subject to income tax withholding.
The distinction is important because the ability for most W-2 employees to deduct unreimbursed employee expenses has been suspended under current tax law. Consequently, if an employee receives a taxable reimbursement under a non-accountable plan or is not reimbursed at all, they generally cannot claim a deduction for those business miles. This makes the proper use of an accountable plan important for both tax compliance and employee benefit.