For the final six months of 2022, the standard mileage rate for business travel will increase by 4 cents per mile, from 58.5 to 62.5 cents per mile, according to IRS Announcement 2002-13. The rate for deductible medical or moving expenses will likewise increase from 18 to 22 cents per mile.
Since January 1, 2018, moving expenses are only deductible and therefore eligible for tax-free reimbursement for active-duty military members, due to the change in the law made by the Tax Cuts and Jobs Act of 2017 (TCJA). Although employers can still reimburse non-military employees for moving expenses, such reimbursements are taxable wage income to the employee, subject to income and employment taxes (including both the employer and employee share of Social Security and Medicare taxes). Employers can take a compensation deduction for those reimbursements.
Generally, the adjustment is made annually but the IRS issued a rare mid-year announcement to better reflect recent increases in fuel prices. The last mid-year adjustment was in 2011 under similar rising fuel prices.
Unfortunately, the IRS cannot increase the 14 cents-per-mile rate for using a personal automobile in connection with charitable contribution deductions, because that rate is fixed by statute in IRC Section 170(i). Accordingly, Congress would need to increase that rate.
Accountable Plan Rules
The optional business standard mileage rate can be used to compute the deductible costs of operating a personal automobile for business use in lieu of tracking actual costs and is often used to calculate the reimbursement to employees. For the reimbursement to be tax-free, the employee must submit an expense report under an “accountable plan” established by the employer. Accountable plans are not required to be in writing, but must include these three rules:
- There is a business connection to the expenditure.
- There is adequate accounting by the recipient within a reasonable period of time (60 days is an IRS safe harbor for being a reasonable period of time).
- Excess reimbursements or advances are returned within a reasonable period of time.
Business Connection vs. Commuting
Tax-free mileage allowances for using a personal vehicle to commute to work have never been allowed, since commuting is generally a personal (not business) expense. The IRS defines commuting as expenses incurred traveling between an individual’s residence and a work location that is not temporary.
IRC Section 132(f) allows for tax-free qualified transportation fringe benefits (i.e., parking, public transit or commuter highway vehicles up to $280 per month for 2022), but that does not include mileage reimbursements.
Effective January 1, 2018, the TCJA eliminated employers’ deductions for any expense incurred for providing transportation or any payment or reimbursement to an employee in connection with travel between the employee’s residence and place of employment, i.e., commuting expenses, except as necessary to ensure the employee’s safety. So even if an employer treats commuting reimbursements as taxable compensation, the employer cannot deduct those expenses.
During the COVID pandemic (and most likely beyond), many employers required (or allowed) employees to work remotely. Employers that do not dictate where employees live must determine where the employee’s “tax home” is located in order to sort out business vs. commuting expenses. Generally, an employee’s tax home is the entire metropolitan area that includes his/her principal place of business, which may or may not be in the employee’s personal residence. Criteria for deductibility or tax-free reimbursement of the expense include:
- Reasonable and necessary
- Incurred while away from the employee’s tax home and
- Incurred in the pursuit of the employer’s business
or example, an employer may allow an employee to work remotely in Florida, where the principal work location (i.e., the employee’s “tax home”) is in New York. From time to time, the employer requires the employee to travel to New York for work. Many employers and employees think this is tax-free “business travel” since the reason for the travel is because the employer required the employee to be in New York. But the IRS views this as taxable to the employee (because it involves personal commuting).
Similarly, an employee that continues to work from his/her residence post-COVID in the same town as an employer provided office, who is reimbursed mileage when they visit the office at the employer’s request, might also have taxable compensation for the reimbursement.
The employer cannot deduct the reimbursements in these examples even if they properly include the taxable amount in the employee’s Form W-2 as taxable compensation.