Business Mileage Reimbursement – Do You Really Make Money?

In 2012 the IRS standard business mileage reimbursement rate is 55.5 cents per mile. (the 2013 business mileage reimbursement rate has been announced since this post went live.) If you drive a lot of business miles it can be a pretty hefty addition to your standard income. At one point I was driving 720 miles a week for business. Unfortunately, only 365 of those miles were reimbursable, which ended up being $202.58 in mileage reimbursement a week! I did this for about 12 weeks for a total of roughly $2,400.

Whenever I’ve talked to anyone who receives mileage checks they all tell me how much money they “make” by driving for business miles. The mileage rate more than covers the cost of the gas they use! I want to challenge this assumption. The IRS doesn’t aim for people to make money for getting mileage reimbursement so what costs are assumed in that 55.5 cents per mile? According to the IRS (Rev Proc 2010-51), “Items such as depreciation [decrease in value] or lease payments, maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, and license and registration fees” are the types of costs covered by this mileage rate. It turns out that 55.5 cents per mile isn’t just gas money after all.

So how did I use my mileage reimbursement? I decided I would add my actual business gas usage to my gas budget and then figure out what to do with the rest. I would take the actual miles on my expense report divided by my actual miles per gallon (MPG) to get the number of gallons of gas I used for business purposes. I calculated the gas mileage of my car each time I filled up the tank. To do this:

  1. Reset your odometer when you first fill up your tank. In order for this to work you have to completely fill your tank.
  2. Drive like normal and don’t reset your odometer.
  3. The next time you go to the gas station fully fill you gas tank again. Check your odometer and divided the number of miles you drove by the number of gallons of gas you just put in your tank to get your miles per gallon (MPG).
  4. You can now reset your odometer again for your next tank of gas.

Turns out I averaged 40 MPG in my Honda Civic as these were mostly highway miles. Next I took the 720 miles I drove per week and divided by my MPG (40) to find out I used 18 gallons of gas per week for business purposes. Multiply that times an average gas price to get your additional business gas cost. For simplicity I assumed gas would be 3.50 a gallon for a total of $63 dollars per week in gasoline costs.

Running the numbers means that after spending $63 in gas I still had $140 a week left over! Great deal… until you consider the other costs the IRS listed. This money was supposed to cover the decrease in value and lifespan of my car and help me pay for any maintenance or repairs, including oil changes, due to the extra mileage. It is also supposed to cover my insurance costs, license and registration fees and any personal property taxes I would have to pay. That $140 had a long way to go.

So what should you do with your “extra” mileage money that exceeds the cost of your gas? Hopefully you are already paying your insurance, license and registration fees and property taxes. Driving a few extra miles for business shouldn’t cause those items to increase in cost so I didn’t allocate any extra money to those items. Extra maintenance and oil changes will probably increase with mileage so putting some money aside for those items would be a good idea. The big money item in the list is the decrease in value and lifespan of your car. I suggest you put the rest of the money in a new car fund to replace your car and the value it lost from your business miles when it eventually gets sold or scrapped if you drive it into the ground.

Now if I wasn’t paying attention this money would have gone into my checking account along with my paychecks and I could have very easily spent it along with my normal money. If I wasn’t careful I could have adjusted my lifestyle up to the additional income since the money was coming in so regularly. Instead I saved that extra $140 a week. I already had enough money put away for car maintenance so I put the whole $140 into my new car fund for when I eventually need a newer car. After 12 weeks my new car fund had an additional $1,680 in my new car fund. Not bad for being a disciplined saver.

You may be able to take a mileage reimbursement deduction if you own your own business but you can’t deduct mileage paid to you by someone else.

What will you be doing with your mileage reimbursement money in the future now that you know all of the costs it is supposed to cover? Let me know in the comments below!

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. I love it! I don’t get reimbursed by my employer so I get to deduct all of my mileage for tax purposes. It really helps our tax refund and I’ve been putting more miles on my car now than ever before, so next year should be pretty sweet!

  2. Ha! Nice topic. I had a lot of time to think about this question when I had to drive back and forth between NY and MI last for a project. I was collecting something like $250 for each trip in reimbursement. At first I thought it was kinda cool. But then when my car needed more oil changes, tires replaced, serpentine belts changed, transmission fluid changes, engine looked at, etc, etc, etc, I realized that aging my car faster than it needs to was really not worth it. I rent a car now whenever work sends me anywhere.

  3. Terrific breakdown. I had business miles before and knew it was more than gas, but never did my due diligence. Thanks! Great point about saving that money in the car fund rather than blowing it on other things.

  4. When I have to drive for work I get reimbursed both for gas and mileage. It’s great.

  5. Gas mileage deduction is helpful, but you definitely don’t make money out of it. It’s great that you have written a post that clears it up. If you think driving extra miles will make you more money, you are so wrong. It’s a waste. But when added in this deduction with your other biz deductions can make a difference.

  6. MickeyVee says:

    Why didn’t you use that for your ROTH? It’s money that comes in without paying taxes and can be invested tax free. Am I missing something?

    • Technically it isn’t earned income so you can’t use it for a Roth. On another note I max out my Roth every year anyway so it wouldn’t have mattered.

  7. The key word is “optional” [standard mileage rates]. My company reimburses at a lower rate than IRS calculation. I suppose the reason my company’s reimbursement rate is different is because my travel is minimal (less than a dozen times a year, 60 miles round trip), which doesn’t have a significant impact on wear&tear, maintenance, depreciation, and insurance costs. So, their calculation really covers gas and that’s it. I’m fine with that. It’s more than zero. People have the right to write-off the difference between the IRS rate and their company’s rate. Thing is, since it’s a write-off it is not likely to affect exceeding the standard deduction in many scenarios, so it won’t help reduce a person’s taxes, either. Catch-22. I’m happy to get the “more than zero” rate (~50%) from my company. :-)

  8. I’d like to know why my company benefits at my expense when it comes to gas mileage reimbursement. I drive my car and the company Munson Healthcare reimburses me finally 40 cents bumped up recently from 30 cents but they get to pocket the remaining 26.5 cents. They claim to be a profit free company/hospital. I would think their would be a law against companies taking advantage of their employers.

    • They don’t profit from it. They don’t get money from the IRS for mileage and the fact that they pay you at all for your mileage is an expense to them. Do they provide the option of a company car? Either way, 40 cents a mile is definitely better than nothing! They don’t have to reimburse you at all if they don’t want to.

  9. Am I missing something or does 720*.55 actually equal something like 385?

    • I forgot to mention that only 365 miles were reimbursable, the rest were my commute and I couldn’t be reimbursed for those. I have updated the post. Thanks for pointing that out.

  10. Steve Wilson says:

    Good article and discussion. I’m 50% owner of my business and trying to decide if I should lease a car through the company or have my own car and submit mileage for reimbursement. I handle sales for us so I travel. General comments?

    • The only savings you’d have would be tax savings. Either way, you have to pay for a car. However, since you’re only 50% owner you have to take that into consideration too. I’m not a big fan about leasing cars though, I’d rather own them personally. I don’t have any experience with a business owning/leasing a car though.

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