IRS Accountable Plan: How Tax-Free Mileage Reimbursement Works

The IRS treats employer mileage reimbursement as tax-free only when the reimbursement comes through an "accountable plan." Reimbursement under a non-accountable plan is taxable as W-2 wages.

Three requirements for accountable-plan status

IRS rules under Treasury Regulation 1.62-2 require all three:

• 1. Business connection. Expenses must be incurred during business activities, not personal.
• 2. Substantiation. Employee documents date, amount, place, and business purpose. For mileage, that is a contemporaneous log with the four required IRS fields.
• 3. Return of excess. If employer pays an advance and actual expense is less, employee returns the difference within reasonable time (typically 60 days).

Failing any one fails the plan

If a plan misses any one of the three, ALL reimbursements become taxable wages. The employee pays federal, state, FICA, and Medicare on the full amount. The employer reports on the W-2.

Accountable plan in practice

• Employee submits monthly expense report with date, destination, business purpose, miles per trip
• Employer reimburses at IRS standard rate (72.5¢/mile in 2026)
• No advances; reimbursement is for miles already driven
• Documentation kept for at least 4 years

What is NOT accountable

• Flat car allowance regardless of miles: fully taxable
• Reimbursement above IRS rate without substantiation: excess is taxable
• Reimbursement without mileage logs
• Advances not reconciled against actual expenses

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