IRS Delays Mileage Rate Reduction

Issue:
A post-holiday business trip has one of your employees on the road from December 30, 1998, through January 5, 1999. She turns in her expense reimbursement form which reflects347 miles driven in all, 116 miles before December 31 and 231 miles after. Does this make a difference in the mileage reimbursement she is entitled to receive?

Answer:
No, because the Internal Revenue Service is postponing until April 1, 1999, the effective date of the 31 cents-per-mile business standard mileage rate it previously said would become effective January 1, 1999. Accordingly, the current business standard mileage rate of 32.5 cents per mile continues to apply with respect to mileage allowances paid to an employee before April 1, 1999, for transportation expenses paid or incurred before that date. This same rate also continues to apply for purposes of computing the amount allowable as a deduction for business-related transportation expenses paid or incurred before April 1, 1999.

Travel expense deductions.
Generally, amounts received by an employee as an advance, allowance, or reimbursement for business-related travel expenses may be deducted from the employee’s wages if:

• the expenses are adequately accounted for to the employer; and
• the expenses are “ordinary and necessary” and incurred away from home.

Special substantiation requirements are imposed on employees with regard to their claimed business deductions and income tax credits concerning business-related travel expenses. Using a fixed mileage allowance to pay an employee’s ordinary and necessary expenses of local travel or transportation while traveling away from home satisfies the substantiation requirements if:

• the allowance does not exceed the IRS-designated business standard mileage rate; and
• the time, place, and business purpose of the travel or transportation are substantiated.

If these requirements are met, an employee will not be subject to federal income tax or social security tax on the reimbursement amount.

Operating costs decrease.
The IRS had lowered the business standard mileage rate based on an annual study of the fixed and variable costs of operating an automobile conducted on its behalf by an independent contractor. Falling gasoline prices and slow depreciation rates for automobiles reportedly influenced the decision.

Many employers will require additional time to implement this new, lower rate, especially to convert computer software. Without additional time, employers who normally reimburse business transportation expenses of employees at the standard rate, and who are unable to implement the lower rate by January 1, 1999, would need to treat the excess over 31 cents per mile as wages to the employee for federal employment tax purposes. Further, employees would be required to include the excess in gross income.

Cite: Announcement 99-7, Rev. Proc. 98-63, published in 1998-52 I.R.B. (Dec. 28, 1998).

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