You Could Be Overspending on Mileage Reimbursement
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The Internal Revenue Service sets its “Safe Harbor” standard mileage rate each year in mid-December. While many companies use this rate as an easy rate by which to reimburse employees who drive for work, the Safe Harbor Rate is actually not a recommended reimbursement rate or methodology.
In the following slides, Motus CEO Craig Powell breaks down the key facts that accountants need to know about the Safe Harbor Rate – including how to use it correctly and alternative approaches that could provide more fair, accurate and cost-effective mileage reimbursements.
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1. The IRS Safe Harbor Rate is announced each December.
The IRS Safe Harbor Rate is a fixed, nationally-averaged rate that is calculated based on the average cost of operating a vehicle in the previous year. In other words, the new 2017 rate, which was just announced, is based on data from the 2016 calendar year.
<b>2. The IRS Safe Harbor Rate has some drawbacks.</b>
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2. The IRS Safe Harbor Rate has some drawbacks.
Using the IRS Safe Harbor rate to reimburse employees that drive more than 3,000 miles per year for business can cost companies a lot of money.
One big reason is that it treats all employees the same. The IRS Safe Harbor rate does not account for variable driving costs that can change from month to month (such as gas prices), nor does it consider the variations in costs from state to state for things like insurance. Using the IRS rate may over-reimburse some, and may under reimburse others.
Beyond inaccuracy, any methodology that reimburses all employees based on a fixed rate may introduce legal risk if employees can prove that their costs exceed the rate they’re being reimbursed. Companies like Radio Shack and Starbucks have learned this the hard way.
3. The IRS recommends FAVR.
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The fixed and variable rate (FAVR) methodology, which calculates reimbursement rates based on an individual driver’s location and mileage-specific costs, is the only mileage reimbursement approach recommended by the IRS. FAVR recognizes that owning a car and driving that car incur different costs, and breaks reimbursement calculations into two separate cost categories.
Like the IRS Safe Harbor Rate, FAVR reimbursements are paid tax-free under IRS Revenue Procedure 2010-51. This means that both employers and employees avoid paying taxes on the reimbursement amounts.
4. FAVR accounts for fixed and variable costs associated with owning and driving a car for business.
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5. The benefits of FAVR.
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FAVR may sound more complex than using the IRS Safe Harbor Rate for mileage reimbursement, but there are many benefits that make it worth considering:
* FAVR methodology reimburses employees for operational costs based on where they operate their vehicle and the number of miles driven.
* FAVR reimbursements are tax-free, eliminating tax waste for both employers and employees.
* Using FAVR mitigates the risk of employee legal action, which can cost businesses millions.