Mileage Reimbursement Tax Benefits and State Laws

Tracking Mileage For Taxes

In 2008 a Starbuck employee in California sued her employer for non-payment of mileage reimbursement and was rewarded $8M for her troubles.

Tax free Mileage Reimbursements – Tax Benefits

There are no federal laws mandating that an employer must reimburse their employees for travel expenses such as rental cars, hotels, and flights. However, there are many federal tax deductions that companies and their employees can take advantage of in relation to travel expenses incurred by employees.

Car Allowance – everyone loses

Some employers may take the easy route of providing a monthly car allowance to their employees, but here everyone loses money due to taxes incurred both by employer and employee.. The only way to make these payments non-taxable are to use Accountable MIleage Reimbursement plans.

So it makes financial sense to reimburse employees not only for the tax benefit of the company but to alleviate the hardship that out-of-pocket expenses might bring to an employee.

State laws mandate Mileage Reimbursement

In some cases, companies may be breaking state law when they require their employees to foot the bill for business expenses. States such as California, the District of Columbia, Illinois, Iowa, Massachusetts, Montana, New Hampshire, North Dakota and South Dakota have expense indemnification laws in place making it illegal for a company to pass on business expenses to their employees.

Mileage reimbursement works the same way, laws vary state by state but there are no federal laws mandating reimbursement for the business use of a personal vehicle. However if an employer implements a mileage reimbursement program within a company, federal law dictates how that program should be structured.

Equality for everyone

The law governing mileage reimbursement puts a great deal of emphasis on the equal treatment of employees who participate in the program. Mileage reimbursement is one way for companies to pay their employees’ tax-free money when employees use their personal vehicles for business. Changes in tax laws in 2017 created less opportunity for employees to write off certain vehicle expenses.

In turn, many employees expect their employers to reimburse them in full for business expenses that are incurred. Keeping that in mind, it’s especially important to understand what this means for your company and how it complies with the law in your state.

There are two types of mileage reimbursement used in the United States. CPM (cent per mile) and FAVR (fixed and variable rate.)


The federal government sets a CPM (cent per mile) rate each year for companies that choose to use this program. Depending on the type of business driving that you do, you can claim the following rates or in many cases participating employers will pay their driver this flat rate and there are no mileage caps or limits in this program. CPM is very straightforward:

58.5 cents per mile driven for business use, up 2.5 cents from the rate for 2021, 18 cents per mile driven for medical, or moving purposes for qualified active-duty members of the Armed Forces, up 2 cents from the rate for 2021 and

14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2021.

FAVR (Fixed and Variable Rate):

Like CPM, the federal government has created laws that companies must abide by when instituting a FAVR mileage reimbursement program. FAVR is a specific calculation that includes fixed and variable expenses that car owners incur based on where they live. Fixed costs like auto insurance, depreciation, maintenance as well as variable costs such as fuel all play a role in calculating a FAVR rate.

FAVR emphasizes that all employees must be reimbursed fairly and on a level playing ground. A company cannot play favorites or be discriminatory in any way.

Drivers must drive at least 5000 miles per year. If a user drives less than 5,000 miles in a year, the company must switch to a CPM calculation to stay in compliance.

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