The basic rule when managing mileage expenses and reimbursements is that only ‘business-related’ costs should be reimbursed.
It seems so simple, but it’s not. The confusion lies in what is and isn’t a business-related journey - particularly if it involves a commuting component.
It’s a confusion that often leads to businesses losing out. How? They reimburse unnecessary travel costs and raise the risks of compliance breaches.
So here’s a look at the issue and how to better manage mileage tracking and reimbursements:
Should mileage reimbursement cover travel to the office?
The simple answer is no.
The general rule is that work-related journeys are those that take place only after an employee has started work. So traveling to a workplace is classed as a private journey, not a legitimate claim.
This is based on the guidance provided by the tax authorities. For financial compliance, it simplifies the process to follow these guidelines. However, it is ultimately a choice for each employer to define their expense policy (within the confines of the law).
What are the IRS rules on commuting expenses?
Generally, the IRS does not accept commuter journeys as being tax-deductible. The IRS defines a commute as being “transportation between your home and your main or regular place of work.”
There are exceptions to this rule, including:
- Trips to a temporary work location, if for less than a year;
- Travel to work for a temporary job, if for less than a year; or
- If an employee has declared their home as an office
So from a tax perspective, an employee’s regular commute is not tax-deductible. But a non-regular journey from their home to a client’s workplace or conference would be tax-deductible.
These discrepancies can create a grey area when it comes to the establishment and enforcement of the automobile travel section of a company expense policy. Why? Because the ‘business’ component of a drive can be viewed as the distance over and above an employee’s normal commute.
What does that mean? Here’s an example:
Let’s say an employee normally commutes four miles to work by car. In their expense report, they request a standard mileage rate reimbursement for the 16-mile drive from home to a business conference. Within the IRS stipulations, their normal commute distance (four miles) can be subtracted from their journey to the conference (16 miles). This means that, according to the IRS, their final mileage reimbursement would be for 12 miles.
This subtraction is often referred to as “offset mileage.”
This off-setting method is commonly used by public sector organizations. It allows employees to be flexible while making sure employers are covering only the business-related part of an automobile journey.
Traditionally, finance teams have been slow to off-set mileage due to the administrative complexity of the process. With a manual method, users or admins would be required to calculate the distance by manually deduct these ‘private’ trips from mileage claims. Technology has made this process much easier - and faster.
So, how can technology help ‘offset mileage’ for expense reimbursement?
Here’s how it works:
- Finance teams can set individuals’ commutable mileage within their user profile
- Mileage claims that involve travel from the person’s home are automatically deducted with the commuting distance.
- Only the ‘business’ portion of the journey is reimbursed.
This saves businesses unnecessary costs paying out on commutable mileage allowance and increases compliance.