Definition of IRS Publication 463
IRS Publication 463 sets the rules for companies to help them determine what business expenses are tax-deductible. It also helps those who are self-employed understand what they can and cannot deduct on their taxes, and provides guidelines for the most beneficial and IRS-compliant ways in which individuals and businesses can lower their overall tax burden.
IRS Pub 463 guidelines are designed to prevent tax fraud and assist companies in creating their own corporate travel policies, especially when it comes to their company vehicle program and mileage reimbursement program.
As companies have different policies in place for how their employees are compensated or reimbursed when it comes to a car allowance rate, use of a company vehicle, mileage allowance, FAVR program, and more, let’s take a look at how IRS Publication 463 for 2019 and IRS Publication 463 for 2020 impact these programs.
Companies that use a cent per mile reimbursement program pay their drivers for mileage driven in their personal vehicle for business purposes. Many businesses prefer to use this program because it's straightforward, and it's not taxable to employers or employees, as long as they go by the IRS Standard Mileage Rate, which is 57.5 cents per mile in 2020, down from 58 cents per mile for the 2019 tax year.
Impact of IRS Publication 463 on Car Allowances
A car allowance is what an employer pays their employees for using their personal vehicle for business reasons. It’s a set amount and meant to cover expenses like fuel, wear-and-tear, maintenance, and more.
According to IRS Publication 463, a car allowance meets the accounting requirements for the amount of an employee’s expenses only if all the following conditions apply:
- The employer limits expense payments to those that are ordinary and necessary in the employee’s line of business.
- The allowance is similar to and not more than the federal rate.
- The employee can submit their expenses to their employer within a reasonable period of time.
- The employee isn’t related to their employer. If they are related, then the employee must prove their expenses to the IRS, even if they have already accounted for their employer.
- Any excess received by the employee must be returned to their employer within a timely period.
Company Vehicles | ASC 842
When a business provides company vehicles to its employees, the good news is that employees don’t have to account for using their own car for their job. However, if the company’s vehicle program operates with leased vehicles, then it has to comply with ASC 842.
ASC 842, also known as the Accounting Standards Codification Topic 842, is the new lease accounting standard published by the Financial Accounting Standards Board (FASB). It replaced ASC 840, which is 40 years old and ASC 842 is meant to close the loophole in ASC 840 that allowed companies to keep operating leases off of their balance sheets. Public companies began implementing the new standard after December 15, 2018. Private companies have until December 15, 2020 to implement it.
FAVR Mileage Program for Personal or Company Vehicles
Many companies utilize a Fixed and Variable Rate (FAVR) reimbursement program to account for the higher or lower vehicle costs reflected in different regions of the country. The IRS separates these by fixed costs and variable costs.
Fixed costs include:
- registration fees
- insurance premiums
Examples of variable costs are:
The IRS views this as similar to its Standard Mileage Rate, but FAVR is considered to be a more fair and accurate reimbursement based on the varying costs in the specific area in which the business operates.
For companies that use a FAVR program, their employees receive a non-taxable reimbursement, as long their employer follows the process outlined in Revenue Procedure 2010-51.
Conclusion on IRS Publication 463
IRS Publication 463 may seem like a long document full of rules and jargon, but in reality, it actually makes business travel easier to manage. The tax code helps companies set their guidelines for travel expenses while ensuring compliance.
Publication 463 also reinforces the need for having your employees use a mileage and expense tracking tool, like Everlance, which makes it easier for your staff to keep track of their business mileage and expenses and be able to provide accurate records of their expenses in a timely manner.