The tax man cometh, logging miles — in a manner of speaking. On Friday (Dec. 14), the Internal Revenue Service (IRS) updated the standard mileage rates, which apply in part to vehicles used for business purposes.
The mileage rate increase should spur businesses to consider how they reimburse the drivers who are part of everyday business operations, especially in the age of the mobile (literally) worker. For where there are reimbursement considerations, compliance issues are close at hand.
Companies, after all, are required to reimburse their employees — whether tied to small business (SMB) or large fleet operators — for business miles driven. As one firm, Motus, noted in its own take on the change, the IRS rate is geared toward low-mileage vehicle use, at less than 5,000 business miles logged annually. Companies that log up to about 20,000 business miles can opt to use a fixed- and variable-rate methodology to reimburse employees, as well as claim deductions.
However, push the odometers higher than those rates, and managing driver-related costs may be best tied to technology leveraged to accurate mileage reporting, and streamlining the costs of maintaining and using vehicles — among the highest operating costs, now much more expensive in the wake of the new mileage rates.
Beginning Jan. 1, 2019, the rates go to $.58 per mile, up three and half cents from 2018’s rate. As always, that stated mileage rate helps employers by giving them some input when it comes to estimating the deductible costs tied to the operation of vehicles, or even a fleet of vehicles.
There are a number of moving parts that should spur business owners to consider how and why they account for costs and reimburse drivers, with implications for both the bottom line and compliance activities. Beyond and beneath the headline numbers, though, it should be noted that this is no edict from on high.
“Although the IRS sets the rate, it is not a mandated or optimal reimbursement method for all drivers,” said Motus upon the debut of the latest IRS announcement.
In an interview with PYMNTS, Danielle Lackey, chief legal officer at Motus, stated that there are other avenues by which firms can calculate deductions and reimbursements for employees who are tied to the day-to-day operations of vehicles. It pays to calculate the actual expenses tied to the vehicles — and yet, in some cases, many employers use the standard mileage, simply multiplying the number of miles by the rate. Simple method, perhaps, but such an approach to this often-significant operating expense glosses over insight that can be of financial, and even strategic, value.
At the highest level, said Lackey, “the overarching mindset is that companies should be thinking about mileage reimbursement as they would any other expense.” She noted that the rate published this past week is intended as rate for deductions, not necessarily for reimbursements.
The fact remains that companies using the deduction rate for reimbursement — those companies that have drivers who log a significant number of miles as road warriors — are likely over-reimbursing employees for the cost of each mile. Lackey related to PYMNTS that a number of inputs go into calculating the standard rate, including fixed costs such as insurance, registration fees and taxes. Spread out against those fixed costs, reimbursing employees more per mile (especially with a more than $.03 hike in the offing) can have an impact on the bottom line.
A company with 200 cars on the road, and with 10,000 miles driven per car, now has an additional $70,000 in reimbursement expenses with the rate hike — a new cost structure that comes pretty much instantly.
Against that backdrop, said Lackey, “I would expect to see businesses looking more closely” at such operating costs. The easy, default method of using the IRS business mileage rate pales in efficiency when drivers — especially, say, mobile workers — are traveling a lot for their employers.
When it comes to reimbursement, compliance issues need scrutiny, too. As noted during this past fall in this space, a number of states — most recently among them Illinois — have changed how employees are reimbursed for business-related expenses. In some cases, firms must reimburse workers for “all necessary expenditures” incurred.
Getting a sense of the actual costs means going beyond simple calculations — tracking, say, gas prices that vary across state lines and knowing who was where, when and for what purposes. Relying on receipts is no panacea, and manual data entry is time-consuming and sometimes error-prone. Plus, as Lackey told PYMNTS, when the costs incurred for business purposes (including mileage) are netted out against employee compensation that, on its face, is at or just above minimum wage (and ultimately results in compensation that falls below minimum wage), the employer can face class action suits or be on the hook for fines.
For these companies, said Lackey, “it is advisable to consider if they want to move to a platform that is intended for reimbursement of high-mileage drivers.” Simply put, technology (such as that offered by Motus via the cloud, and across mileage tracking and analytics) can ensure that firms have “[good and] defensible data that shows the rates that they select” — such as through a fixed- and variable-rate reimbursement plan, which accounts for these costs and offers a monthly allowance — “are not falling short.”
Tech platforms that offer analytics functions can show the granularity and impact of a fleet — where, for example, 10 percent of vehicles are driving 5,000 miles a year, but 20 percent are driving 6,000 miles a year. Plus, she said, the compliance considerations will differ for drivers in San Francisco versus those based in Boise. Better access to data, in a streamlined manner, means not just seeing where costs exist, but how they can be managed efficiently.
“The first part of predicting the future,” said Lackey, “is knowing what you are doing now.”