Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit, or
abatement;
determination of correct tax liability.
(Also Part I, §§ 62, 162, 170, 213, 217, 274, 1016; 1.62-2, 1.162-17,
1.170A-1, 1.213-1,
1.217-2, 1.274-5, 1.1016-3.)
Rev. Proc. 2005-78
SECTION 1. PURPOSE
This revenue procedure updates Rev. Proc. 2004-64, 2004-49 I.R.B. 898,
as
modified by Announcement 2005-71, 2005-41 I.R.B. 714, and provides
optional
standard mileage rates for employees, self-employed individuals, or
other taxpayers to
use in computing the deductible costs of operating an auto for
business,
charitable, medical, or moving expense purposes. In addition, this
revenue procedure
provides optional standard mileage rates for computing the deductible
costs of
operating an auto in providing donated services to charity for the
provision of
relief related to Hurricane Katrina and for determining the amount that
may be excluded
from income by taxpayers who are reimbursed for such use. This revenue
procedure
also provides rules under which the amount of ordinary and necessary
expenses of
local travel or transportation away from home that are paid or incurred
by an employee
will be deemed substantiated under § 1.274-5 of the Income Tax
Regulations if a payor
(the employer, its agent, or a third party) provides a mileage allowance
under a
reimbursement or other expense allowance arrangement to pay for the
expenses. Use
2
of a method of substantiation described in this revenue procedure is not
mandatory and
a taxpayer may use actual allowable expenses if the taxpayer maintains
adequate
records or other sufficient evidence for proper substantiation. The
Internal Revenue
Service prospectively adjusts the business, medical, and moving standard
mileage rates
annually (to the extent warranted).
SECTION 2. SUMMARY OF STANDARD MILEAGE RATES
.01 Standard mileage rates
(1) Business (section 5 below) 44.5 cents per mile
(2) Charitable contribution (section 7 below)
(a) General 14 cents per mile
(b) Hurricane Katrina deduction 32 cents per mile
(c) Hurricane Katrina reimbursement 44.5 cents per mile
(3) Medical and moving (section 7 below) 18 cents per mile
.02 Determination of standard mileage rates. The business, medical, and
moving
standard mileage rates reflected in this revenue procedure are based on
an annual
study of the fixed and variable costs of operating an auto
conducted on behalf of
the Service by an independent contractor. The charitable contribution
standard mileage
rate is provided in § 170(i) of the Internal Revenue Code. The Hurricane
Katrina
charitable contribution deduction standard mileage rate is established
by § 303 of the
Katrina Emergency Tax Relief Act of 2005, Pub. L. No. 109-73, 119 Stat.
2016
(KETRA). The Hurricane Katrina charitable contribution reimbursement
standard
mileage rate is established by § 304 of KETRA.
3
SECTION 3. BACKGROUND AND CHANGES
.01 Section 162(a) allows a deduction for all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any
trade or business.
Under that provision, an employee or self-employed individual may deduct
the cost of
operating an auto to the extent that it is used in a trade or
business. However,
under § 262, no portion of the cost of operating an auto that is
attributable to
personal use is deductible.
.02 Section 274(d) provides, in part, that no deduction is allowed under
§ 162
with respect to any listed property (as defined in § 280F(d)(4) to
include passenger
automobiles and any other property used as a means of transportation)
unless the
taxpayer complies with certain substantiation requirements. Section
274(d) further
provides that regulations may prescribe that some or all of the
substantiation
requirements do not apply to an expense that does not exceed an amount
prescribed by
the regulations.
.03 Section 1.274-5(j), in part, grants the Commissioner of Internal
Revenue the
authority to establish a method under which a taxpayer may use mileage
rates to
substantiate, for purposes of § 274(d), the amount of the ordinary and
necessary
expenses of using a vehicle for local transportation and transportation
to, from, and at
the destination while traveling away from home.
.04 Section 1.274-5(g), in part, grants the Commissioner the authority
to
prescribe rules relating to mileage allowances for ordinary and
necessary expenses of
using a vehicle for local transportation and transportation to, from,
and at the destination
4
while traveling away from home. Pursuant to this grant of authority, the
Commissioner
may prescribe rules under which the allowances, if in accordance with
reasonable
business practice, will be regarded as (1) equivalent to substantiation,
by adequate
records or other sufficient evidence, of the amount of the travel and
transportation
expenses for purposes of § 1.274-5(c), and (2) satisfying the
requirements of an
adequate accounting to the employer of the amount of the expenses for
purposes of
§ 1.274-5(f).
.05 Section 62(a)(2)(A) allows an employee, in determining adjusted
gross
income, a deduction for the expenses allowed by Part VI (§ 161 and
following),
subchapter B, chapter 1 of the Code, paid or incurred by the employee in
connection
with the performance of services as an employee under a reimbursement or
other
expense allowance arrangement with a payor.
.06 Section 62(c) provides that an arrangement will not be treated as a
reimbursement or other expense allowance arrangement for purposes of §
62(a)(2)(A) if
it--
(1) does not require the employee to substantiate the expenses covered
by the arrangement to the payor, or
(2) provides the employee with the right to retain any amount in excess
of
the substantiated expenses covered under the arrangement.
Section 62(c) further provides that the substantiation requirements
described therein do
not apply to any expense to the extent that, under the grant of
regulatory authority in
§ 274(d), the Commissioner has provided that substantiation is not
required for the
5
expense.
.07 Under § 1.62-2(c)(1), a reimbursement or other expense allowance
arrangement satisfies the requirements of § 62(c) if it meets the
requirements of
business connection, substantiation, and returning amounts in excess of
expenses as
specified in the regulations. Section 1.62-2(e)(2) specifically provides
that
substantiation of certain business expenses in accordance with rules
prescribed under
the authority of § 1.274-5(g) will be treated as substantiation of the
amount of the
expenses for purposes of § 1.62-2. Under § 1.62-2(f)(2), the
Commissioner may
prescribe rules under which an arrangement providing mileage allowances
will be
treated as satisfying the requirement of returning amounts in excess of
expenses, even
though the arrangement does not require the employee to return the
portion of the
allowance that relates to miles of travel substantiated and that exceeds
the amount of
the employee's expenses deemed substantiated pursuant to rules
prescribed under
§ 274(d), provided the allowance is reasonably calculated not to exceed
the amount of
the employee's expenses or anticipated expenses and the employee is
required to
return any portion of the allowance that relates to miles of travel not
substantiated.
.08 Section 1.62-2(h)(2)(i)(B) provides that if a payor pays a mileage
allowance
under an arrangement that meets the requirements of § 1.62-2(c)(1), the
portion, if any,
of the allowance that relates to miles of travel substantiated in
accordance with
§ 1.62-2(e), that exceeds the amount of the employee's expenses deemed
substantiated for the travel pursuant to rules prescribed under § 274(d)
and
§ 1.274-5(g), and that the employee is not required to return, is
subject to withholding
6
and payment of employment taxes. See §§ 31.3121(a)-3,
31.3231(e)-1(a)(5),
31.3306(b)-2, and 31.3401(a)-4 of the Employment Tax Regulations.
Because the
employee is not required to return this excess portion, the reasonable
period of time
provisions of § 1.62-2(g) (relating to the return of excess amounts) do
not apply to this
excess portion.
.09 Under § 1.62-2(h)(2)(i)(B)(4), the Commissioner may provide special
rules
regarding the timing of withholding and payment of employment taxes on
mileage
allowances.
.10 Section 303 of KETRA provides that the standard mileage rate for
purposes
of computing the amount allowable as a charitable contribution deduction
for the cost of
operating an auto for the provision of relief related to Hurricane
Katrina during the
period beginning on August 25, 2005, and ending on December 31, 2006,
shall be 70
percent of the business standard mileage rate in effect. Section 304 of
KETRA provides
that taxpayers may exclude from income an amount computed at the
business standard
mileage rate received from a charity as reimbursement for the cost of
operating an
auto for the provision of relief related to Hurricane Katrina
during the period
beginning on August 25, 2005, and ending on December 31, 2006. Sections
2.01 and
7.01 of this revenue procedure are revised to include these special
charitable
contribution standard mileage rates for 2006. For the period beginning
on August 25,
2005, and ending on August 31, 2005, the charitable contribution
standard mileage rate
is 29 cents for deduction purposes and 40.5 cents for reimbursement
purposes. For the
period beginning on September 1, 2005, and ending on December 31, 2005,
the
7
charitable contribution standard mileage rate is 34 cents for deduction
purposes and
48.5 cents for reimbursement purposes.
.11 Section 5.06(3) of this revenue procedure clarifies the limitation
on use of the
business standard mileage rate by a taxpayer that has claimed the
special depreciation
allowance under § 168(k). Section 8.04(1) clarifies the limitation on
use of a fixed and
variable rate (FAVR) allowance with respect to an auto for which
an employee
has claimed the special depreciation allowance under § 168(k). Section
8.05(4) clarifies
the requirement that an employer’s FAVR allowance or allowances must
cover at least
five or more employees. Section 8.05(5) clarifies the requirement that
an employee
may not participate in a FAVR allowance unless the cost of the
employee’s auto
was at least 90 percent of the standard auto cost.
SECTION 4. DEFINITIONS
.01 Standard mileage rate. The term "standard mileage rate" means the
applicable amount provided by the Service for optional use by employees
or
self-employed individuals in computing the deductible costs of operating
automobiles
(including vans, pickups, or panel trucks) they own or lease for
business purposes, or
by taxpayers in computing the deductible costs of operating automobiles
for charitable,
medical, or moving expense purposes.
.02 Transportation expenses. The term "transportation expenses" means
the
expenses of operating an auto for local travel or transportation
away from home.
.03 Mileage allowance. The term "mileage allowance" means a payment
under a
reimbursement or other expense allowance arrangement that meets the
requirements
8
specified in § 1.62-2(c)(1) and that is:
(1) paid with respect to the ordinary and necessary business expenses
incurred, or that the payor reasonably anticipates will be incurred, by
an employee for
transportation expenses in connection with the performance of services
as an employee
of the employer,
(2) reasonably calculated not to exceed the amount of the expenses or
the
anticipated expenses, and
(3) paid at the applicable standard mileage rate, a flat rate or stated
schedule, or in accordance with any other Service-specified rate or
schedule.
.04 Flat rate or stated schedule. A mileage allowance is paid at a flat
rate or
stated schedule if it is provided on a uniform and objective basis with
respect to the
expenses described in section 4.03 of this revenue procedure. The
allowance may be
paid periodically at a fixed rate, at a cents-per-mile rate, at a
variable rate based on a
stated schedule, at a rate that combines any of these rates, or on any
other basis that is
consistently applied and in accordance with reasonable business
practice. Thus, for
example, a periodic payment at a fixed rate to cover the fixed costs
(including
depreciation (or lease payments), insurance, registration and license
fees, and personal
property taxes) of driving an auto in connection with the
performance of services
as an employee of the employer, coupled with a periodic payment at a
cents-per-mile
rate to cover the operating costs (including gasoline and all taxes
thereon, oil, tires, and
routine maintenance and repairs) of using an auto for those
purposes, is an
allowance paid at a flat rate or stated schedule. Likewise, a periodic
payment at a
9
variable rate based on a stated schedule for different locales to cover
the costs of
driving an auto in connection with the performance of services as
an employee is
an allowance paid at a flat rate or stated schedule.
SECTION 5. BUSINESS STANDARD MILEAGE RATE
.01 In general. The standard mileage rate for transportation expenses is
44.5
cents per mile for all miles of use for business purposes.
.02 Use of the business standard mileage rate. A taxpayer may use the
business
standard mileage rate with respect to an auto that is either owned
or leased by
the taxpayer. A taxpayer generally may deduct an amount equal to either
the business
standard mileage rate times the number of business miles traveled or the
actual costs
(both operating and fixed) paid or incurred by the taxpayer that are
allocable to traveling
those business miles.
.03 Business standard mileage rate in lieu of operating and fixed costs.
A
deduction using the standard mileage rate for business miles is computed
on a yearly
basis and is in lieu of all operating and fixed costs of the auto
allocable to
business purposes (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, and license and
registration fees
are included in operating and fixed costs for this purpose.
.04 Parking fees, tolls, interest, and taxes. Parking fees and tolls
attributable to
use of the auto for
business purposes may be deducted as separate
items.
Likewise, interest relating to the purchase of the auto as well as
state and local
10
personal property taxes may be deducted as separate items, but only to
the extent
allowable under § 163 or § 164, respectively. Section 163(h)(2)(A)
expressly provides
that interest is nondeductible personal interest if it is paid or
accrued on indebtedness
properly allocable to the trade or business of performing services as an
employee.
Section 164 expressly provides that state and local taxes that are paid
or accrued by a
taxpayer in connection with an acquisition or disposition of property
will be treated as
part of the cost of the acquired property or as a reduction in the
amount realized on the
disposition of the property. If the auto is operated less than 100
percent for
business purposes, an allocation is required to determine the business
and nonbusiness
portion of the taxes and interest deduction allowable.
.05 Depreciation. For owned automobiles
placed in service for business
purposes, and for which the business standard mileage rate has been used
for any
year, depreciation will be considered to have been allowed at the rate
of 15 cents per
mile for 2002, 16 cents per mile for 2003 and 2004, and 17 cents per
mile for 2005 and
2006, for those years in which the business standard mileage rate was
used. If actual
costs were used for one or more of those years, the rates above do not
apply to any
year in which actual costs were used. The depreciation described above
will reduce the
basis of the auto (but not below zero) in determining adjusted
basis as required
by § 1016.
11
.06 Limitations.
(1) The business standard mileage rate may not be used to compute the
deductible expenses of (a) automobiles used for hire, such as taxicabs,
or (b) five or
more automobiles owned or leased by a taxpayer and used simultaneously
(such as in
fleet operations).
(2) The business standard mileage rate may not be used to compute the
deductible business expenses of an auto leased by a taxpayer
unless the
taxpayer uses either the business standard mileage rate or a FAVR
allowance (as
provided in section 8 of this revenue procedure) to compute the
deductible business
expenses of the auto for the entire lease period (including
renewals). For a lease
commencing on or before December 31, 1997, the "entire lease period"
means the
portion of the lease period (including renewals) remaining after that
date.
(3) The business standard mileage rate may not be used to compute the
deductible expenses of an auto for which the taxpayer has (a)
claimed
depreciation using a method other than straight-line for its estimated
useful life, (b)
claimed a § 179 deduction, (c) claimed the special depreciation
allowance under
§ 168(k), or (d) used the Accelerated Cost Recovery System (ACRS) under
former
§ 168 or the Modified Accelerated Cost Recovery System (MACRS) under
current
§ 168. By using the business standard mileage rate, the taxpayer has
elected to
exclude the auto (if owned) from MACRS pursuant to § 168(f)(1).
If, after using
the business standard mileage rate, the taxpayer uses actual costs, the
taxpayer must
use straight-line depreciation for the auto's remaining estimated
useful life
12
(subject to the applicable depreciation deduction limitations under §
280F).
(4) The business standard mileage rate and this revenue procedure may
not be used to compute the amount of the deductible auto expenses
of an
employee of the United States Postal Service incurred in performing
services involving
the collection and delivery of mail on a rural route if the employee
receives qualified
reimbursements (as defined in § 162(o)) for the expenses. See § 162(o)
for the rules
that apply to these qualified reimbursements.
SECTION 6. RESERVED
SECTION 7. CHARITABLE, MEDICAL, AND MOVING STANDARD MILEAGE RATES
.01 Charitable. Section 170(i) provides a standard mileage rate of 14
cents per
mile for purposes of computing the charitable contribution deduction for
use of an
auto in connection with rendering gratuitous services to a
charitable organization
under § 170. The standard mileage rate is 32 cents per mile for purposes
of computing
the charitable contribution deduction for use of an auto in
providing donated
services to charity for the provision of relief related to Hurricane
Katrina. The standard
mileage rate is 44.5 cents per mile for purposes of determining the
amount that may be
excluded from income by taxpayers who are reimbursed for the use of an
auto in
providing donated services to charity for the provision of relief
related to Hurricane
Katrina.
.02 Medical and moving. The standard mileage rate is 18 cents per mile
for use
of an auto (a) to obtain medical care described in § 213, or (b)
as part of a move
for which the expenses are deductible under § 217.
13
.03 Charitable, medical, or moving expense standard mileage rates in
lieu of
operating expenses. A deduction computed using the applicable standard
mileage rate
for charitable, medical, or moving expense miles is in lieu of all
operating expenses
(including gasoline and oil) of the auto allocable to those
purposes. Costs for
items such as depreciation (or lease payments), insurance, and license
and registration
fees are not deductible, and are not included in the standard mileage
rates.
.04 Parking fees, tolls, interest, and taxes. Parking fees and tolls
attributable to
the use of the auto for charitable, medical, or moving expense
purposes may be
deducted as separate items. Interest relating to the purchase of the
auto and
state and local personal property taxes are not deductible as
charitable, medical, or
moving expenses, but they may be deducted as separate items to the
extent allowable
under § 163 or § 164, respectively.
SECTION 8. FIXED AND VARIABLE RATE ALLOWANCE
.01 In general.
(1) The ordinary and necessary expenses paid or incurred by an
employee in driving an auto owned or leased by the employee in
connection with
the performance of services as an employee of the employer will be
deemed
substantiated (in an amount determined under section 9 of this revenue
procedure)
when a payor reimburses those expenses with a mileage allowance using a
flat rate or
stated schedule that combines periodic fixed and variable rate payments
that meet all
the requirements of section 8 of this revenue procedure (a FAVR
allowance).
(2) The amount of a FAVR allowance must be based on data that (a) is
14
derived from the base locality, (b) reflects retail prices paid by
consumers, and (c) is
reasonable and statistically defensible in approximating the actual
expenses employees
receiving the allowance would incur as owners of the standard
auto.
.02 Computation of FAVR allowance.
(1) FAVR allowance. A FAVR allowance includes periodic fixed payments
and periodic variable payments. A payor may maintain more than one FAVR
allowance. A FAVR allowance that uses the same payor, standard
auto (or an
auto of the same make and model that is comparably equipped),
retention period,
and business use percentage is considered one FAVR allowance, even
though other
features of the allowance may vary. A FAVR allowance also includes any
optional high
mileage payments; however, optional high mileage payments are included
in the
employee's gross income, are reported as wages or other compensation on
the
employee's Form W-2, and are subject to withholding and payment of
employment
taxes when paid. See section 9.05 of this revenue procedure. An optional
high mileage
payment covers the additional depreciation for a standard auto
attributable to
business miles driven and substantiated by the employee for a calendar
year in excess
of the annual business mileage for that year. If an employee is covered
by the FAVR
allowance for less than the entire calendar year, the annual business
mileage may be
prorated on a monthly basis for purposes of the preceding sentence.
(2) Periodic fixed payment. A periodic fixed payment covers the
projected
fixed costs (including depreciation (or lease payments), insurance,
registration and
license fees, and personal property taxes) of driving the standard
auto in
15
connection with the performance of services as an employee of the
employer in a base
locality, and must be paid at least quarterly. A periodic fixed payment
may be computed
by (a) dividing the total projected fixed costs of the standard
auto for all years of
the retention period, determined at the beginning of the retention
period, by the number
of periodic fixed payments in the retention period, and (b) multiplying
the resulting
amount by the business use percentage.
(3) Periodic variable payment. A periodic variable payment covers the
projected operating costs (including gasoline and all taxes thereon,
oil, tires, and routine
maintenance and repairs) of driving a standard auto in connection
with the
performance of services as an employee of the employer in a base
locality, and must be
paid at least quarterly. The rate of a periodic variable payment for a
computation period
may be computed by dividing the total projected operating costs for the
standard
auto for the computation period, determined at the beginning of
the computation
period, by the computation period mileage. A computation period can be
any period of
a year or less. Computation period mileage is the total mileage
(business and personal)
a payor reasonably projects a standard auto will be driven during
a computation
period and equals the retention mileage divided by the number of
computation periods
in the retention period. For each business mile substantiated by the
employee for the
computation period, the periodic variable payment must be paid at a rate
that does not
exceed the rate for that computation period.
(4) Base locality. A base locality is the particular geographic locality
or
region of the United States in which the costs of driving an auto
in connection
16
with the performance of services as an employee of the employer are
generally paid or
incurred by the employee. Thus, for purposes of determining the amount
of fixed costs,
the base locality is generally the geographic locality or region in
which the employee
resides. For purposes of determining the amount of operating costs, the
base locality is
generally the geographic locality or region in which the employee drives
the auto
in connection with the performance of services as an employee of the
employer.
(5) Standard auto. A standard auto is the auto
selected by the payor on which a specific FAVR allowance is based.
(6) Standard auto cost. The standard auto cost for a
calendar year may not exceed 95 percent of the sum of (a) the retail
dealer invoice cost
of the standard auto in the base locality, and (b) state and local
sales or use
taxes applicable on the purchase of the auto. Further, the
standard auto
cost may not exceed $27,400.
(7) Annual mileage. Annual mileage is the total mileage (business and
personal) a payor reasonably projects a standard auto will be
driven during a
calendar year. Annual mileage equals the annual business mileage divided
by the
business use percentage.
(8) Annual business mileage. Annual business mileage is the mileage a
payor reasonably projects a standard auto will be driven by an
employee in
connection with the performance of services as an employee of the
employer during the
calendar year, but may not be less than 6,250 miles for a calendar year.
Annual
business mileage equals the annual mileage multiplied by the business
use percentage.
17
(9) Business use percentage. A business use percentage is determined
by dividing the annual business mileage by the annual mileage. The
business use
percentage may not exceed 75 percent. In lieu of demonstrating the
reasonableness of
the business use percentage based on records of total mileage and
business mileage
driven by the employees annually, a payor may use a business use
percentage that is
less than or equal to the following percentages for a FAVR allowance
that is paid for the
following annual business mileage:
Annual business mileage Business use percentage
6,250 or more but less than 10,000 45 percent
10,000 or more but less than 15,000 55 percent
15,000 or more but less than 20,000 65 percent
20,000 or more 75 percent
(10) Retention period. A retention period is the period in calendar
years
selected by the payor during which the payor expects an employee to
drive a standard
auto in connection with the performance of services as an employee
of the
employer before the auto is replaced. The period may not be less
than two
calendar years.
(11) Retention mileage. Retention mileage is the annual mileage
multiplied by the number of calendar years in the retention period.
(12) Residual value. The residual value of a standard auto is the
projected amount for which it could be sold at the end of the retention
period after being
driven the retention mileage. The Service will accept the following safe
harbor residual
18
values for a standard auto computed as a percentage of the
standard auto
cost:
Retention period Residual value
2-year 70 percent
3-year 60 percent
4-year 50 percent
.03 FAVR allowance in lieu of operating and fixed costs.
(1) A reimbursement computed using a FAVR allowance is in lieu of the
employee's deduction of all the operating and fixed costs paid or
incurred by an
employee in driving the auto 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 operating and fixed costs
for this purpose.
(2) Parking fees and tolls attributable to an employee driving the
standard
auto in connection with the performance of services as an employee
of the
employer are not included in fixed and operating costs and may be
deducted as
separate items. Similarly, interest relating to the purchase of the
standard auto
may be deducted as a separate item, but only to the extent that the
interest is an
allowable deduction under § 163.
.04 Depreciation.
(1) A FAVR allowance may not be paid with respect to an auto for
19
which the employee has (a) claimed depreciation using a method other
than
straight-line for its estimated useful life, (b) claimed a § 179
deduction, (c) claimed the
special depreciation allowance under § 168(k), or (d) used ACRS under
former § 168 or
MACRS under current § 168. If an employee uses actual costs for an owned
auto that has been covered by a FAVR allowance, the employee must
use
straight-line depreciation for the auto's remaining estimated
useful life (subject to
the applicable depreciation deduction limitations under § 280F).
(2) Except as provided in section 8.04(3) of this revenue procedure, the
total amount of the depreciation component for the retention period
taken into account
in computing the periodic fixed payments for that retention period may
not exceed the
excess of the standard auto cost over the residual value of the
standard
auto. In addition, the total amount of the depreciation component
may not
exceed the sum of the annual § 280F limitations on depreciation (in
effect at the
beginning of the retention period) that apply to the standard auto
during the
retention period.
(3) If the depreciation component of periodic fixed payments exceeds the
limitations in section 8.04(2) of this revenue procedure, that section
will be treated as
satisfied in any year during which the total annual amount of the
periodic fixed
payments and the periodic variable payments made to an employee driving
80 percent
of the annual business mileage of the standard auto does not
exceed the amount
obtained by multiplying 80 percent of the annual business mileage of the
standard
auto by the
business standard mileage rate for that year (under
section 5.01 of
20
the applicable revenue procedure).
(4) The depreciation included in each periodic fixed payment portion of
a
FAVR allowance paid with respect to an auto will reduce the basis
of the
auto (but not below zero) in determining adjusted basis as
required by § 1016.
See section 8.07(2) of this revenue procedure for the requirement that
the employer
report the depreciation component of a periodic fixed payment to the
employee.
.05 FAVR allowance limitations.
(1) A FAVR allowance may be paid only to an employee who
substantiates to the payor for a calendar year at least 5,000 miles
driven in connection
with the performance of services as an employee of the employer or, if
greater, 80
percent of the annual business mileage of that FAVR allowance. If the
employee is
covered by the FAVR allowance for less than the entire calendar year,
these limits may
be prorated on a monthly basis.
(2) A FAVR allowance may not be paid to a control employee (as defined
in § 1.61-21(f)(5) and (6), excluding the $100,000 limitation in
paragraph (f)(5)(iii)).
(3) An employer may not pay a FAVR allowance if at any time during a
calendar year a majority of the employees covered by the FAVR allowance
are
management employees.
(4) An employer may not pay a FAVR allowance to any employee unless
at all times during a calendar year at least five employees in total are
covered by FAVR
allowances provided by the employer.
(5) A FAVR allowance may be paid only with respect to an auto
21
(a) owned or leased by the employee receiving the payment, (b) the cost
of which, as a
new vehicle (whether or not purchased new by the employee), was at least
90 percent
of the standard auto cost taken into account for purposes of
determining the
FAVR allowance for the first calendar year the employee receives the
allowance with
respect to that auto, and (c) the model year of which does not
differ from the
current calendar year by more than the number of years in the retention
period.
(6) A FAVR allowance may not be paid with respect to an auto
leased by an employee for which the employee has used actual expenses to
compute
the deductible business expenses of the auto for any year during
the entire lease
period. For a lease commencing on or before December 31, 1997, the
"entire lease
period" means the portion of the lease period (including renewals)
remaining after that
date.
(7) The insurance cost component of a FAVR allowance must be based
on the rates charged in the base locality for insurance coverage on the
standard
auto during the current calendar year without taking into account
rate-increasing
factors such as poor driving records or young drivers.
(8) A FAVR allowance may be paid only to an employee whose insurance
coverage limits on the auto with respect to which the FAVR
allowance is paid are
at least equal to the insurance coverage limits used to compute the
periodic fixed
payment under that FAVR allowance.
.06 Employee reporting. Within 30 days after an employee's auto is
initially covered by a FAVR allowance, or is again covered by a FAVR
allowance if
22
coverage has lapsed, the employee by written declaration must provide
the payor with
the following information: (a) the make, model, and year of the
employee's auto,
(b) written proof of the insurance coverage limits on the auto,
(c) the odometer
reading of the auto, (d) if owned, the purchase price of the
auto or, if
leased, the price at which the auto is ordinarily sold by
retailers (the gross
capitalized cost of the auto), and (e) if owned, whether the
employee has claimed
depreciation with respect to the auto using any of the
depreciation methods
prohibited by section 8.04(1) of this revenue procedure or, if leased,
whether the
employee has computed deductible business expenses with respect to the
auto
using actual expenses. The information described in (a), (b), and (c) of
the preceding
sentence also must be supplied by the employee to the payor within 30
days after the
beginning of each calendar year that the employee's auto is
covered by a FAVR
allowance.
.07 Payor recordkeeping and reporting.
(1) The payor or its agent must maintain written records setting forth
(a)
the statistical data and projections on which the FAVR allowance
payments are based,
and (b) the information provided by the employees pursuant to section
8.06 of this
revenue procedure.
(2) Within 30 days of the end of each calendar year, the employer must
provide each employee covered by a FAVR allowance during that year with
a statement
that, for auto owners, lists the amount of depreciation included
in each periodic
fixed payment portion of the FAVR allowance paid during that calendar
year and
23
explains that by receiving a FAVR allowance the employee has elected to
exclude the
auto from the Modified Accelerated Cost Recovery System pursuant
to
§ 168(f)(1). For auto lessees, the statement must explain that by
receiving the
FAVR allowance the employee may not compute the deductible business
expenses of
the auto using actual expenses for the entire lease period
(including renewals).
For a lease commencing on or before December 31, 1997, the "entire lease
period"
means the portion of the lease period (including renewals) remaining
after that date.
.08 Failure to meet section 8 requirements. If an employee receives a
mileage
allowance that fails to meet one or more of the requirements of section
8 of this revenue
procedure, the employee may not be treated as covered by any FAVR
allowance of the
payor during the period of the failure. Nevertheless, the expenses to
which that mileage
allowance relates may be deemed substantiated using the method described
in sections
5, 9.01(1), and 9.02 of this revenue procedure to the extent the
requirements of those
sections are met.
SECTION 9. APPLICATION
.01 If a payor pays a mileage allowance in lieu of reimbursing actual
transportation expenses incurred or to be incurred by an employee, the
amount of the
expenses that is deemed substantiated to the payor is either:
(1) for any mileage allowance other than a FAVR allowance, the lesser of
the amount paid under the mileage allowance or the applicable standard
mileage rate in
section 5.01 of this revenue procedure multiplied by the number of
business miles
substantiated by the employee; or
24
(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 business miles substantiated by the employee and 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 If the amount of transportation expenses is deemed substantiated
under the
rules provided in section 9.01 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 in accordance with paragraphs (b)(2) (travel
away from
home) and (b)(6) (listed property, which includes passenger automobiles
and any other
property used as a means of transportation) of § 1.274-5T, and paragraph
(c) of
§ 1.274-5, the employee is deemed to satisfy the adequate accounting
requirements of
§ 1.274-5(f) as well as the requirement to substantiate by adequate
records or other
sufficient evidence for purposes of § 1.274-5(c). See § 1.62-2(e)(1) for
the rule that an
arrangement must require business expenses to be substantiated to the
payor within a
reasonable period of time.
.03 An arrangement providing mileage allowances will be treated as
satisfying
the requirement of § 1.62-2(f)(2) with respect to returning amounts in
excess of
expenses as follows:
(1) For a mileage allowance other than a FAVR allowance, the
25
requirement to return excess amounts will be treated as satisfied if the
employee is
required to return within a reasonable period of time (as defined in §
1.62-2(g)) any
portion of the allowance that relates to miles of travel not
substantiated by the
employee, even though the arrangement does not require the employee to
return the
portion of the allowance that relates to the miles of travel
substantiated and that
exceeds the amount of the employee's expenses deemed substantiated. For
example,
assume a payor provides an employee an advance mileage allowance of $97
based on
an anticipated 200 business miles at 48.5 cents per mile (at a time when
the business
standard mileage rate is 44.5 cents per mile), and the employee
substantiates 120
business miles. The requirement to return excess amounts will be treated
as satisfied if
the employee is required to return the portion of the allowance that
relates to the 80
unsubstantiated business miles ($38.80) even though the employee is not
required to
return the portion of the allowance ($4.80) that exceeds the amount of
the employee's
expenses deemed substantiated under section 9.01 of this revenue
procedure ($53.40)
for the 120 substantiated business miles. However, the $4.80 excess
portion of the
allowance is treated as paid under a nonaccountable plan as discussed in
section 9.05.
(2) For a FAVR allowance, the requirement to return excess amounts will
be treated as satisfied if the employee is required to return within a
reasonable period of
time (as defined in § 1.62-2(g)), (a) the portion (if any) of the
periodic variable payment
received that relates to miles in excess of the business miles
substantiated by the
employee, 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.
26
.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 9.01 of this revenue procedure,
provided the
employee substantiates in accordance with section 9.02. See §
1.274-5T(f)(2)(i). In
addition, 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 9.01 of this revenue procedure, provided the employee
substantiates in
accordance with section 9.02 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 9.06(2) of this revenue
procedure with respect to leased automobiles, if the amount of the
expenses deemed
substantiated under the rules provided in section 9.01 of this revenue
procedure is less
than the amount of the employee's business transportation expenses, the
employee
27
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, includes on Form
2106,
Employee Business Expenses, 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, substantiation of the amount of the expenses is not required
if the employee
is claiming a deduction that is equal to or less than the applicable
standard mileage rate
multiplied by the number of business miles substantiated by the employee
minus the
amount deemed substantiated under section 9.01 of this revenue
procedure. The
itemized deduction is subject to the 2-percent floor on miscellaneous
itemized
deductions provided in § 67.
(2) An employee whose business transportation expenses with respect to
a leased auto are deemed substantiated under section 9.01(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 9.06(1) unless the
employee does
so consistently beginning with the first business use of the auto
after December
31, 1997. An employee whose business transportation expenses with
respect to a
leased auto are deemed substantiated under section 9.01(2) of this
revenue
procedure (relating to a FAVR allowance) may not claim a deduction based
on actual
expenses.
28
.07 An employee may deduct an amount computed pursuant to section 5.01
of
this revenue procedure only as an itemized deduction. This itemized
deduction is
subject to the 2-percent floor on miscellaneous itemized deductions
provided in § 67.
.08 A self-employed individual may deduct an amount computed pursuant to
section 5.01 of this revenue procedure in determining adjusted gross
income under
§ 62(a)(1).
.09 If a payor's reimbursement or other expense allowance arrangement
evidences a pattern of abuse of the rules of § 62(c) and the regulations
thereunder, all
payments under the arrangement will be treated as made under a
nonaccountable plan.
Thus, the payments are included in the employee's gross income, are
reported as
wages or other compensation on the employee's Form W-2, and are subject
to
withholding and payment of employment taxes. See § 1.62-2(c)(3), (c)(5),
and (h)(2).
SECTION 10. WITHHOLDING AND PAYMENT OF EMPLOYMENT TAXES
.01 The portion of a mileage allowance (other than a FAVR allowance), if
any,
that relates to the miles of business travel substantiated and that
exceeds the amount
deemed substantiated for those miles under section 9.01(1) of this
revenue procedure is
subject to withholding and payment of employment taxes. See §
1.62-2(h)(2)(i)(B).
(1) In the case of a mileage allowance paid as a reimbursement, the
excess described in section 10.01 of this revenue procedure is subject
to withholding
and payment of employment taxes in the payroll period in which the payor
reimburses
the expenses for the business miles substantiated. See § 1.62-2(h)(2)(i)(B)(2).
(2) In the case of a mileage allowance paid as an advance, the excess
29
described in section 10.01 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 with respect to which the advance was
paid are
substantiated. See § 1.62-2(h)(2)(i)(B)(3). If some or all of the
business miles with
respect to 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) In the case of 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 8 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 9.01(1) of this revenue procedure by
comparing the total
mileage allowance paid for the period to the standard mileage rate in
section 5.01 of this
revenue procedure multiplied by the number of business miles
substantiated by the
employee 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, assume an employer pays its employees a mileage
30
allowance at a rate of 48.5 cents per mile (when the business standard
mileage rate is
44.5 cents per mile). The employer does not require the return of the
portion of the
allowance that exceeds the business standard mileage rate for the
business miles
substantiated (4 cents). In June, the employer advances an employee
$242.50 for 500
miles to be traveled during the month. In July, the employee
substantiates to the
employer 400 business miles traveled in June and returns $48.50 to the
employer for
the 100 business miles not traveled. The amount deemed substantiated for
the 400
miles traveled is $178 and the employee is not required to return $16.
No later than the
first payroll period following the payroll period in which the 400
business miles traveled
are substantiated, the employer must withhold and pay employment taxes
on $16.
.02 The portion of a FAVR allowance, if any, that exceeds the amount
deemed
substantiated for those miles under section 9.01(2) of this revenue
procedure is subject
to withholding and payment of employment taxes. See § 1.62-2(h)(2)(i)(B).
(1) Any periodic variable rate payment that relates to miles in excess
of
the business miles substantiated by the employee and that the employee
fails to return
within a reasonable period, or 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 within a reasonable period, 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).
(2) Any optional high mileage payment is subject to withholding and
payment of employment taxes when paid.
31
SECTION 11. EFFECTIVE DATE
This revenue procedure is effective for (1) deductible transportation
expenses
paid or incurred on or after January 1, 2006, and (2) mileage allowances
or
reimbursements paid to an employee or to a charitable volunteer (a) on
or after January
1, 2006, and (b) with respect to transportation expenses paid or
incurred by the
employee or charitable volunteer on or after January 1, 2006.
SECTION 12. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2004-64, as modified by Announcement 2005-71, is superseded.
DRAFTING INFORMATION
The principal author of this revenue procedure is John Roman Faron of
the Office
of Associate Chief Counsel (Income Tax and Accounting). For further
information
regarding this revenue procedure, contact Mr. Faron at (202) 622-4930
(not a toll-free
call).
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