Employees Driving Own Vehicles for Work?

Each year IRS publishes rates which employers and self-employed persons can use to deduct automobile expenses for the business use of a car, van, pickup or panel truck. IRS standard rates for deducting automobile expenses decrease 1/2 a cent in 2020 to 57.5 cents per mile (which includes vehicle depreciation of 27 cents per mile), down from 58 cents in 2019. This minor change comes after a more than 6% jump the prior year. In 2018 the standard rate for business use of an automobile was just 54.5 cents per mile.

Employers can deduct ordinary and necessary auto expenses on their business’s income tax return or Schedule C of 1040 if self-employed.

But what happens when employees drive their own vehicles for work?

Tax Cuts and Jobs Act eliminates the miscellaneous itemized deduction for unreimbursed employee expenses through 2025. So, most employees who drive their own vehicles while performing services as an employee for their employer cannot deduct those expenses on their individual tax return, at least through 2025. This means many employees who drive for their employers using their own vehicle will make less money through 2025 because they’ll pay taxes on their income but can’t deduct the expenses of driving.

The good news is employers can cover the employees’ driving costs while on company business; like gas, insurance, depreciation, maintenance and more as long as the expenses qualify as ordinary and necessary business expenses. Ordinary and necessary means the expense is customary and accepted in the company’s industry and helpful to the business. These costs are deductible by the employer, and the employee recovers costs of driving their own vehicle.

But is this taxable income to the employee? The answer depends on the method the employer chooses.

Today, SoundCPA Insights for Business compares traditional employee vehicle allowances vs. FAVR Expense Reimbursement plans. Which is right for your organization in 2020? Find out how employers and employees can both capture tax savings with SoundCPA Insights for Business.