Private Letter Ruling 9547001
Background. The IRS has issued a ruling that addresses the correct tax treatment of employer reimbursements of employee car expenses using the “standard mileage rate.” The ruling provides excellent guidance to church treasurers.
Facts. An employer adopted two approaches for reimbursing its employees’ business use of their privately-owned cars. “Non-supervisory employees” were required to supply odometer readings to document all business miles for purposes of calculating their reimbursable business mileage. Employees were reimbursed under this arrangement at the standard mileage rate specified by the IRS (30 cents per mile in 1995). “Supervisory employees” were reimbursed at a specified “per diem” (daily) rate or the standard mileage rate, whichever was greater. Odometer readings were not required on supervisory employees’ claim forms. The integrity of the claim was the responsibility of the employee. If the employer for any reason questioned a particular claim, the employee had to provide evidence supporting the claim of distance traveled.
What the IRS ruled. The IRS concluded that the employer’s method of reimbursing the business travel expenses of non-supervisory employees was “accountable,” and so the employer’s reimbursements did not represent taxable income to the employees. The IRS concluded that these reimbursements satisfied the three requirements of an “accountable” arrangement: (1) the expenses were for a legitimate business purpose, (2) the reimbursed expenses were adequately substantiated, and (3) any reimbursements in excess of substantiated expenses were returned to the employer. The IRS observed:
[E]mployees … who occupy non-supervisory positions are reimbursed for official use of their privately-owned vehicles at the applicable cents-per-mile rate. The … arrangement requires substantiation of the business use of privately-owned vehicles with mileage records and, thus, satisfies the substantiation requirement of … the regulations. Because non-supervisory employees are reimbursed at the applicable cents-per-mile rate, the return of excess requirement is deemed to be satisfied.
However, the IRS ruled that the supervisory employees were not reimbursed under an accountable arrangement. As a result, all of the employer’s reimbursements of these expenses had to be reported as additional income on the employees’ W-2 forms. The IRS observed:
The supervisors auto arrangement does not require supervisory employees to submit mileage records or return amounts in excess of substantiated expenses. This arrangement also establishes a different rate of reimbursement for supervisory employees. Reimbursements are calculated at [a daily rate] or the applicable cents-per-mile rate, whichever is greater.
To meet the substantiation requirement … of the regulations for passenger automobiles, an arrangement must require the submission of information sufficient to [demonstrate the amount, date, and business purpose of each reimbursed expense]. The supervisors auto arrangement does not require the submission of mileage records and, thus, does not meet the applicable substantiation requirements. In addition, the automobile arrangement provides for reimbursements at the rate of the greater of [a daily rate] or the applicable cents-per-mile rate without requiring the return of amounts in excess of actual or deemed substantiated expenses. Accordingly, the supervisors auto arrangement does not meet the substantiation or return of excess requirements of … the regulations. Therefore, the supervisors auto arrangement is a nonaccountable plan.
Importance to church treasurers. Many churches reimburse the business use of a privately-owned car by a pastor or other staff member using the standard mileage rate. Church treasurers must recognize that the use of the standard mileage rate to reimburse these expenses can be either “accountable” or “nonaccountable,” and that the differences between these two approaches is significant.
- Accountable. Under an accountable arrangement, the church multiplies the standard mileage rate times the number of business miles that a pastor or other staff member substantiates (through a log book, diary, trip sheet, or odometer readings). To satisfy the substantiation requirement the records produced by the minister or other staff member must demonstrate the number of miles driven for business purposes along with the dates of travel. The substantiation and reimbursement should occur no less often than every two months. The church does not include any of the reimbursements as income on the employee’s W-2, and there are no business expenses to deduct.
- Nonaccountable. This ruling illustrates that the use of the standard mileage rate to reimburse business use of a privately-owned car can be “nonaccountable” if the worker is not required to substantiate the business miles that are being reimbursed. In this case the “supervisory employees” were reimbursed for the business miles they claimed without any documentation. The fact that they were required to produce documentation to the employer upon request was not sufficient to make the arrangement accountable.
Tip. If your church uses the standard mileage rate to reimburse an employee’s business use of a privately-owned car, be sure you (1) only reimburse those miles for which the dates of travel and business purpose are adequately substantiated, and (2) reimburse substantiated business miles within 60 days.
Tip. Churches, like other employers, are free to use a rate different from the IRS “standard mileage rate” to reimburse an employee’s business use of a privately-owned car under an otherwise accountable arrangement. If the church uses a rate lower than the IRS approved rate, then the arrangement can be accountable up to the rate used by the church. The employee can treat the difference between the church approved rate and the IRS approved rate as an unreimbursed business expense. If the church uses a rate in excess of the IRS approved rate, then the arrangement can be accountable up to the IRS approved rate and all reimbursements in excess of this amount are then reported as taxable income to the employee on his or her W-2 at year end (assuming the employee is not required to return the excess to the church).
This article originally appeared in Church Treasurer Alert, March 1996.