Each year the IRS announces a new "standard business mileage rate" that can be used by taxpayers to compute a deduction for the business use of a vehicle. This rate also can be used by employers to reimburse workers' substantiated business miles under an accountable expense reimbursement arrangement. The standard mileage rate is an important concept for church treasurers, since many churches reimburse staff members' business miles using this rate.
Example. Pastor Dave owns his car and kept records throughout 2020 showing that he drove the car a total of 15,000 miles, of which 6,000 miles were for business purposes (500 each month). Pastor Dave submitted records to the church treasurer each month documenting business miles driven for the previous month, and he was reimbursed at the standard mileage rate. The standard business mileage rate for 2020 is 57.5 cents per mile. As a result, Pastor Dave will received reimbursement of $3,450 (57.5 cents per mile x 6,000 miles) for the year.
The standard business mileage rate for 2020. The IRS has announced that the standard business mileage rate for 2020 is 57.5 cents per mile.
Reimbursing business miles using the standard mileage rate. Many churches have adopted an accountable reimbursement arrangement that uses a mileage rate to reimburse business miles driven by employees. Some churches use the IRS approved rate, while others use a rate that is either more than or less than the IRS rate. Listed below is a summary of the rules that apply to a church's use of a mileage rate to reimburse employees' business miles.
(1) employees substantiate business miles with adequate records at least every 60 days, and are reimbursed AT the IRS approved rate
This is an "accountable" arrangement, and the church is not required to report the reimbursements as income on employees' W-2 forms. This assumes that employees (1) submit records (such as logs or diaries) substantiating the amount, date, place, and business purpose of all miles driven for business purposes; (2) substantiate business miles within 60 days; and (3) are reimbursed by the church at the IRS approved rate multiplied times the number of substantiated business miles.
Example. A church reimburses business miles driven by staff members at the IRS approved rate. In 2020, the church bookkeeper drives 300 miles each month on church business. The church treasurer reimburses the bookkeeper at a rate of 57.5 cents per mile for all business miles driven each month for which the bookkeeper provides adequate and timely substantiation pursuant to the church's accountable reimbursement arrangement. The reimbursements are not reported as taxable income to the bookkeeper.
Key point. An employer may grant an additional allowance (in excess of the standard mileage rate) for parking fees and tolls. The IRS has ruled that "if an employer grants an allowance not exceeding [the standard mileage rate] to an employee for ordinary and necessary transportation expenses . . . [it also] may grant an additional allowance for the parking fees and tolls attributable to the traveling and transportation expenses as separate items."
Key point. The income tax regulations specify that "a taxpayer may maintain an adequate record for portions of a taxable year and use that record to substantiate the business use of listed property [such as a car] for all or a portion of the taxable year if the taxpayer can demonstrate by other evidence that the periods for which an adequate record is maintained are representative of the use for the taxable year or a portion thereof."
(2) employees substantiate business miles with adequate records at least every 60 days, and are reimbursed at an amount MORE than the IRS approved rate
This arrangement is accountable, but only up to the IRS approved rate.
Example. A church maintains an accountable reimbursement arrangement, but reimburses employees' business miles at a rate of 75 cents per mile. Karen, a church employee, properly substantiates all of her business expenses for 2020, including 5,000 miles that she drives her car for church-related business. The church does not require Karen to return the amount by which her reimbursements exceed the IRS approved rate. The fact that the church reimburses Karen's car expenses at a rate in excess of the IRS approved rate will not render the church's entire reimbursement arrangement "nonaccountable." Rather, only the amount by which the church's reimbursement rate exceeds the IRS rate is treated as nonaccountable. As a result, the church should add $875 (5,000 miles x 17.5 cents) to Karen's W‑2, and Karen should report this amount as income on her Form 1040. The excess cannot be claimed as a deduction since it exceeds the IRS approved rate. Further, as noted below, the excess reimbursements will be subject to tax withholding.
(3) employees substantiate business miles with adequate records at least every 60 days, and are reimbursed at an amount LESS than the IRS approved rate
This arrangement is accountable. The church should not report any reimbursements on an employee's W-2. Employees who itemize deductions on Schedule A (Form 1040) can claim a business expense deduction for the amount by which the IRS approved standard mileage rate exceeds the church's reimbursement rate, multiplied times their substantiated business miles.
Example. A church reimburses substantiated employee business miles at a rate of 30 cents per mile in 2020. Since this reimbursement rate is less than the IRS approved rate (57.5 cents), church staff can claim a business expense deduction of 27.5 cents per mile multiplied times their substantiated business miles. This deduction is subject to the limitations that apply to the deductibility of unreimbursed business expenses.
(4) employees do not substantiate business miles with adequate records, or within 60 days
This is not an accountable arrangement and so the church's reimbursements must be added to each employee's W-2 form as income. Employees can claim a business expense deduction for the business use of their car if they itemize deductions on Schedule A (Form 1040) and have sufficient records to substantiate miles driven for business purposes. The deduction is the standard mileage rate multiplied times the number of substantiated business miles. Employee business expenses are deductible only to the extent that they exceed two percent of the employee's adjusted gross income.
Example. A church requires its pastor to substantiate once each year (in December) all of the business miles that he drove his car that year. He is then reimbursed for these miles at the IRS approved standard mileage rate. This is not an accountable arrangement since the pastor is not required to substantiate business miles within a "reasonable time." The income tax regulations specify that 60 days is presumed to be a reasonable time. As a result, the church must report all of the reimbursements as income on the pastor's W-2 form.
Example. Each month Pastor Ruth orally informs the church treasurer how many business miles she drove her car for the previous month. The treasurer reimburses Pastor Ruth for these miles at the IRS approved rate. This is not an accountable arrangement since Pastor Ruth does not adequately document the amount, date, place, and business purpose of her business miles. As a result, the church must report these reimbursements as income on Pastor Ruth's W-2 form. The income tax regulations specifically prohibit "accounting" to an employer by means of a taxpayer's own oral or written statements. Therefore, a minister will not adequately account to his or her church by orally informing the church treasurer of the amount of business expenses incurred during a particular month, or by signing a statement that merely recites what the minister's business expenses were.
CAUTION. Churches may expose employees, and members of their governing board, to substantial penalties if they fail to report taxable fringe benefits as taxable income. Examples of taxable fringe benefits that often are not reported as taxable income include use of a business mileage rate to reimburse car expenses that exceeds the IRS approved standard business mileage rate, and reimbursement of employees' business miles without requiring adequate substantiation. If such reimbursements are not reported as taxable income to the employee in the year the reimbursements are paid, there are two possible consequences: (1) The employee is subject to back taxes plus penalties and interest on the unreported income. (2) If the benefits are provided to an officer or director of the church (a "disqualified person"), or a relative of such a person, they will expose the recipient and possibly other members of the church's governing board to substantial excise taxes (called intermediate sanctions) since the IRS views these benefits as "automatic" excess benefits unless reported as taxable income by the church or recipient in the year provided. The lesson is clear. Sloppy church accounting practices can be costly to church staff.
Withholding taxes. Ministers' wages are not subject to income tax withholding unless they elect voluntary withholding. But nonminister employee wages are subject to withholding (of income taxes and the employee's share of Social Security and Medicare taxes). The IRS maintains that employers must withhold payroll taxes from any mileage rate reimbursement that exceeds the IRS approved rate. The IRS has provided the following clarification with regard to the timing of withholding:
In the case of a mileage allowance paid as a reimbursement, the excess . . . is subject to withholding and payment of employment taxes in the payroll period in which the payor reimburses the expenses for the business miles substantiated. In the case of a mileage allowance paid as an advance, the excess . . . is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the business miles with respect to which the advance was paid are substantiated. If some or all of the business miles with respect to which the advance was paid are not substantiated within a reasonable period of time and the employee does not return the portion of the allowance that relates to those miles within a reasonable period of time, the portion of the allowance that relates to those miles is subject to withholding and payment of employment taxes no later than the first payroll period following the end of the reasonable period.
Parking fees, tolls, interest, and taxes. In addition to using the standard mileage rate, a church employee can deduct any business-related parking fees and tolls that are not reimbursed by the church. However, parking fees workers pay to park their car at their place of work are nondeductible commuting expenses.
Nonaccountable reimbursements of car expenses. In some cases a church's reimbursements of an employee's car expenses are nonaccountable. This means that the employee is reimbursed for car expenses without an adequate and timely "accounting" of the number of miles driven, the dates of travel, and the business purpose of miles driven. Consider the following example.
Example. Each month Pastor Jerry provides the church treasurer with a statement that recites the number of "business miles" driven during the previous month. The treasurer issues a check for those miles multiplied times the standard mileage rate. In March, Pastor Jerry provides the church treasurer with a written note that lists 400 business miles driven in February. The treasurer issues Pastor Jerry a check in the amount of $230 (400 miles x 57.5 cents).
This example illustrates a nonaccountable reimbursement of expenses associated with the business use of a car. It is important for church treasurers to understand that nonaccountable reimbursements must be reported as taxable income to the employee during the year of payment. Unfortunately, some treasurers fail to report nonaccountable business expense reimbursements as taxable income. This may result in two consequences:
The employee is subject to back taxes plus penalties and interest on the unreported income.
If the reimbursed expenses were incurred by an officer or director of the church (a "disqualified person"), or a relative of such a person, they will expose the recipient and possibly other members of the church's governing board to "intermediate sanctions" in the form of substantial excise taxes, as noted above.
Medical and moving mileage rates. The standard mileage rate for the use of a vehicle for medical or moving purposes is 17 cents per mile in 2020.
Charitable mileage rate. The "charitable" standard mileage rate, which can be used to compute a charitable contribution deduction for unreimbursed miles driven while performing services on behalf of a church or other charity, remains at 14 cents per mile. The charitable mileage rate is set by statute, not the IRS, and so it is not adjusted each year.