SECTION 7. MILEAGE

ALLOWANCES

.01 If a payor pays a mileage allowance in lieu of reimbursing actual transportation expenses an employee incurs or may incur, the payor is deemed to have substantiated either:

(1) For any mileage allowance other than a FAVR allowance, the lesser of the amount paid under the mileage allowance or the business standard mileage rate multiplied by the number of substantiated business miles; or

(2) For a FAVR allowance, the amount paid under the FAVR allowance less the sum of (a) any periodic variable rate payment that relates to miles in excess of the substantiated business miles that the employee fails to return to the payor although required to do so, (b) any portion of a periodic fixed payment that relates to a period during which the employee is treated as not covered by the FAVR allowance and that the employee fails to return to the payor although required to do so, and (c) any optional high mileage payments.

.02 An employee is deemed to satisfy the adequate accounting requirements of § 1.274–5(f) and the requirement to substantiate by adequate records or other sufficient evidence for purposes of § 1.274–5(c) if the amount of transportation expenses is deemed substantiated under the rules provided in section 7.01 of this revenue procedure, and the employee actually substantiates to the payor the elements of time, place (or use), and business purpose of the transportation expenses under § 1.274–5T(b)(2) (travel away from home), § 1.274–5T(b)(6) (listed property, which includes passenger automobiles and any other property used as a means of transportation), and § 1.274–5(c).

.03 An arrangement providing mileage allowances is treated as satisfying the requirement of § 1.62–2(f)(2) on returning amounts in excess of expenses as follows:

(1) For a mileage allowance (other than a FAVR allowance) paid only at a centsper-mile rate, the requirement to return excess amounts is treated as satisfied if an employee is required to return within a reasonable period of time (as defined in § 1.62–2(g)) any portion of the allowance

2010–51 I.R.B. 888 December 20, 2010

ject to withholding and payment of employment taxes in the payroll period in which a payor reimburses the expenses for the substantiated business miles. See § 1.62–2(h)(2)(i)(B)(2).

(2) For a mileage allowance paid as an advance, the excess described in section 8.01 of this revenue procedure is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the business miles for which the advance was paid are substantiated. See § 1.62–2(h)(2)(i)(B)(3). If some or all of the business miles for which the advance was paid are not substantiated within a reasonable period of time and the employee does not return the portion of the allowance that relates to those miles within a reasonable period of time, the portion of the allowance that relates to those miles is subject to withholding and payment of employment taxes no later than the first payroll period following the end of the reasonable period. See § 1.62–2(h)(2)(i)(A).

(3) For a mileage allowance that is not computed on the basis of a fixed amount per mile of travel (for example, a mileage allowance that combines periodic fixed and variable rate payments, but that does not satisfy the requirements of section 6 of this revenue procedure), the payor must compute periodically (no less frequently than quarterly) the amount, if any, that exceeds the amount deemed substantiated under section 7.01(1) of this revenue procedure by comparing the total mileage allowance paid for the period to the business standard mileage rate multiplied by the number of business miles the employee substantiated for the period. Any excess is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the excess is computed. See § 1.62–2(h)(2)(i)(B)(4).

(4) For example, a payor provides employees a mileage allowance under an arrangement that otherwise meets the requirements of an accountable plan at a rate of 60 cents per mile (when the business standard mileage rate is 50 cents per mile). The payor does not require the return of the portion of the allowance that exceeds the business standard mileage rate for the substantiated business miles (10 cents). In June, the payor advances an employee $300.00 for 500 miles to be

substantiated business miles, and (b) the portion (if any) of a periodic fixed payment that relates to a period during which the employee was not covered by the FAVR allowance.

.04 An employee is not required to include in gross income the portion of a mileage allowance received from a payor that is less than or equal to the amount deemed substantiated under section 7.01 of this revenue procedure, provided the employee substantiates under section 7.02 of this revenue procedure. See § 1.274–5T(f)(2)(i). Assuming that the remaining requirements for an accountable plan provided in § 1.62–2 are satisfied, that portion of the allowance is treated as paid under an accountable plan, is not reported as wages or other compensation on the employee’s Form W–2, and is exempt from withholding and payment of employment taxes. See § 1.62–2(c)(2) and (c)(4).

.05 An employee is required to include in gross income the portion of a mileage allowance received from a payor that exceeds the amount deemed substantiated under section 7.01 of this revenue procedure. See § 1.274–5T(f)(2)(ii). In addition, the excess portion of the allowance is treated as paid under a nonaccountable plan, is reported as wages or other compensation on the employee’s Form W–2, and is subject to withholding and payment of employment taxes. See § 1.62–2(c)(3)(ii), (c)(5), and (h)(2)(i)(B).

.06 If an employee’s substantiated expenses are less than the employee’s actual expenses, the following rules apply:

(1) Except as otherwise provided in section 7.06(2) of this revenue procedure on leased automobiles, if the amount of the expenses deemed substantiated under the rules provided in section 7.01 of this revenue procedure is less than the amount of the employee’s business transportation expenses, the employee may claim an itemized deduction for the amount by which the business transportation expenses exceed the amount that is deemed substantiated, provided the employee substantiates all the business transportation expenses (not just the excess over the business standard mileage rate), includes on Form 2106, Employee Business Ex- penses, the deemed substantiated portion of the mileage allowance received from the payor, and includes in gross income the

portion (if any) of the mileage allowance received from the payor that exceeds the amount deemed substantiated. See § 1.274–5T(f)(2)(iii). However, for purposes of claiming this itemized deduction, the employee is not required to substantiate the amount of the expenses if the employee is claiming a deduction that is equal to or less than the business standard mileage rate multiplied by the number of business miles the employee substantiated minus the amount deemed substantiated under section 7.01 of this revenue procedure. The itemized deduction is subject to the 2-percent floor on miscellaneous itemized deductions under § 67.

(2) An employee whose business transportation expenses for a leased automobile are deemed substantiated under section 7.01(1) of this revenue procedure (relating to an allowance other than a FAVR allowance) may not claim a deduction based on actual expenses under section 7.06(1) unless the employee does so consistently beginning with the first business use of the automobile after December 31, 1997. An employee whose business transportation expenses for a leased automobile are deemed substantiated under section 7.01(2) of this revenue procedure (relating to a FAVR allowance) may not claim a deduction based on actual expenses.

.07 An employee may deduct an amount computed under section 4 of this revenue procedure only as an itemized deduction. This itemized deduction is subject to the 2-percent floor on miscellaneous itemized deductions in § 67.

.08 A self-employed individual may deduct an amount computed under section 4 of this revenue procedure in determining adjusted gross income under § 62(a)(1).