employer reimburses standard mileage, TP wants to take actual

[joanmcq]

TP gets reimbursed for employee business miles at the standard mileage rate in an accountable plan. He buys a honkin' big truck and actual expenses (including sec 179) are more than SMR. Auditor is disallowing the excess saying if employer reimburses SMR, then that is all that is allowed. Truck is being used nearly 100% for biz. My take on this is that TP is trying to find a way to write off honkin' big truck that is not necessary for his management job, but is the auditor on the wrong tangent in arguing that tp cannot take actual expenses for vehicle if full SMR is being reimbursed? All I can find is if employer reimburses at less than SMR, you can take additional.

Of course, once all that depreciation is used up, I think he would have to take any excess reimbursment over actual as income....

[Nashville]

Honkin' Big Truck

Joan, I think you are correct, but this is one of those situations where you might win the battle and lose the war. Firstly, if he is an employee he has to give up 2% of AGI before he can get any benefit under either method. And the 2% is applied against the excess only and not the total vehicle expense.

Then the burden is on him to establish percentage of use. Ostensibly, this is upon him under either method, but the auditor can make this portion of the audit very miserable.

I wonder if the taxpayer is prepared for what will happen when the truck becomes fully depreciated. Of course he will probably trade it in for an even honkier big truck, but he will have to reduce his depreciable basis by the trade-in value of his current goose. [honk!] He needs to remember, he is "married" to the actual method.

The auditor can NOT put an economic limit on operational costs, even if he cannot prevail. Disallowing would be like putting a ceiling on the cost of gas, or milk for that matter. Big government can place a limit on their own exposure, but is not willing to do those things within its power to bring relief to the rest of us.

[HONK if you like big trucks!!!]

[veritas]

I think the auditor

is full of beans.

It's not even logical.

The mileage dedcution is optional for the employee not mandatory.

[joanmcq]

Its not my battlel; its one our outside auditors is fighting. We (researching) can't find anything that says he can't do it...I would think the auditor could perhaps hang it on what the employer decrees is 'ordinary and necessary' as can be done with reimbursments for travel, etc. I had thought ahead to the inevitable time the depreciation is done with (and the excess was pretty much all depreciation), and he is stuck with actual, and recapture if use drops below 50%. I hadn't thought about the trade in...the auditor appears to be hanging her hat on just that if the employer reimburses the SMR, the employee can't do this. I'm even wondering how or if he can prove he only drove the truck for his employee biz, since he has a lexus and a volvo too. Jeez, its about $40,000 for two years being audited, and the biz percentages are around 87% for 2005 and 98% for 2006.

I'm sure not saying its a smart thing. Can you believe AMT didn't come into play?

and who here keeps on talking about the difference between pigs and hogs?

[veritas]

Publication 463

gives this example with respect to an accountable plan:

Example 2. In June, Matt takes a 2-day business trip to Boston. Matt's employer uses the high-low method to reimburse employees. Since Boston is a high-cost area, Matt is given an advance of $246 a day ($492 total) for his lodging, meals, and incidental expenses. Matt's actual expenses totaled $700.

Since Matt's $700 of expenses are more than his $492 advance, he includes the excess expenses when he itemizes his deductions. Matt completes Form 2106 (showing all of his expenses and reimbursements). He must also allocate his reimbursement between his meals and other expenses as discussed later under Completing Forms 2106 and 2106-EZ.

So how is this any different than the standard mileage allowance?

[ED SMITH]

The auditor is all wet. The employer can use any method for reimbursing the employee, mileage, flat rate, variable rate, weekly, monthly, etc. The reimbursement has nothing to do with the method chosen by the employee for claiming vehicle expenses, as long as adequate records are kept.

The auditor should be asked to cite the tax code to back up his assertion.

[Bees Knees]

Skimming through Rev. Proc. 2007-70 which discusses the standard mileage rate rules for 2008, there are two separate methods for reimbursing employee business expenses for use of the employee’s vehicle:

• Section 9.01 of Rev. Proc. 2007-70 describes reimbursing expenses using a mileage allowance method.
• Section 9.02 of Rev. Proc. 2007-70 describes reimbursing expenses using a Fixed and Variable Rate Allowance (FAVR) method.

Rules using a FAVR method appear to be complicated, but I did notice one statement made at Section 8.03(1) where it says:

A reimbursement computed using a FAVR allowance is in lieu of the employee's deduction of all the fixed and variable costs paid or incurred by an employee in driving the automobile in connection with the performance of services as an employee of the employer, except as provided in section 9.06 of this revenue procedure. Items such as depreciation (or lease payments), maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, license and registration fees, and personal property taxes are included in fixed and variable costs for this purpose.

In other words, if the FAVR method is chosen to reimburse expenses, the employee cannot turn around and deduct excess actual costs. Otherwise the FAVR method will be considered a nonaccountable plan and any reimbursements must be included in W-2 wages.

What is interesting about this is that the Rev. Proc. specifically mentions this in connection with a FAVR method. IT DOES NOT mention this in connection with the standard mileage rate method. Rules for reimbursing expenses under the standard mileage rate method, as described in this Rev. Proc. simply say the employee must substantiate the miles driven, and any excess reimbursement over substantiated miles, and/or reimbursements in excess of the standard mileage rate, must be returned to the employer in order for it to be considered an accountable plan.

Nothing in the Rev. Proc. says reimbursing at the standard mileage rate is in lieu of the employee’s deduction for actual expenses. It does say:

A deduction using the business standard mileage rate is computed on a yearly basis and is in lieu of all fixed and variable costs…

…but it does not say reimbursing using the standard mileage rate is in lieu of the employee deducting actual costs.

Therefore, it is my opinion that if the employer reimburses using the standard mileage rate, the employee can deduct excess actual expenses on Form 2106. However, if the employer reimburses using the FAVR allowance method, the employee cannot deduct excess expenses on Form 2106.

If I were representing the client, I would pull that Rev. Proc. out and highlight the difference to the auditor. Acknowledging the auditor was sort of on track, just a little mixed up with the rules, may help ease the situation.

[veritas]

I glanced over the

Rev Proc previously. It made me very tired.

[joanmcq]

Bees, I gave your post to my supervisor who was doing the research on this topic and she found it very helpful, particularly your perspective that the rev proc specifically does NOT address SMR in the way it specifically makes the connection to FAVR, and she was able to delve deeper by going along that track.. She had found the rev proc but not connected in that fashion. One reason I love these boards; sometimes you just need a new perspective. Thank you!