What Documents Are Needed for IRS Mileage Reimbursement?
The Internal Revenue Service allows all businesses, both large and small, to reimburse their employees for certain business-related expenses that the employees pay. One common reimbursement is to pay the employee a flat rate per mile driven in the course of conducting business. The type of documentation you need from your employees depends on whether reimbursements are made under an accountable or non-accountable plan.
If you have an accountable plan, any reimbursements you make to your employees must meet three tests. First, all reimbursements must be for expenses the employee incurred performing business-related duties. Second, your employee must provide you with an adequate accounting of his expenses. Lastly, if you issued an advance for the employee to use for expenses, he must return any unused funds. The IRS requires the employee to account for his expenses and return unused funds within a reasonable time. Although the IRS does not provide firm time limits, it considers 60 days as a reasonable length of time to account for expenses and 120 days as reasonable for the return of excess funds. Your circumstances may require you to choose a shorter time. Mileage reimbursements made under an accountable plan are not taxable income for the employee as long as the rate used does not exceed the IRS standard rate for business miles, which was 55.5 cents per mile at the time of publication.
You cannot have an accountable plan unless the employee furnishes you with documentation of his expenses. The employee should provide you with receipts whenever possible as supporting evidence. The IRS will also accept a written record, such as a diary, trip log or notebook, in which the employee notes each expense at or near the time it occurred. For mileage reimbursement, the record should contain the vehicle’s beginning and ending odometer readings, the dates, and the purpose of the trip.
Non-accountable plans are those that do not meet all three of the tests for an accountable plan. Two of these tests, furnishing documentation and returning excess allowances, may be beyond your control. If the expense fails even one of the tests, you must treat the reimbursement as a non-accountable plan reimbursement. This means that the entire reimbursement is taxable income for the employee. Include the amount with the employee’s salaries and wages in box 1 on his W-2. In this instance, the only documentation you might have to furnish the IRS is proof that you issued the payment to the employee.
If you furnish the employee with a vehicle, you cannot use the standard mileage rate to reimburse him for his expenses. You can only reimburse him for his actual expenses, such as repairs, gasoline, tires or maintenance. At minimum, he should provide you with documentation to prove two elements to the IRS: the nature and date of the expense, and proof of payment. A vendor invoice is typically sufficient to satisfy the first condition. A credit card receipt or canceled check should satisfy the second.