Avoid a Hidden Tax Pitfall in Mileage-Reimbursed Vehicles

Many taxpayers assume that once they receive mileage reimbursements at the IRS standard rate, the tax treatment of their vehicle is complete. In reality, this assumption can lead to a missed — and potentially significant — tax deduction.

If you receive mileage reimbursements for business driving, your vehicle may be treated as a business asset for tax purposes, even if it is personally owned. When that vehicle is sold or traded, a taxable event occurs that deserves careful review.

A Common Misunderstanding

Mileage reimbursements paid under an accountable plan and within IRS limits are excluded from taxable income. Because of this, many employees and owner-employees believe there is no further tax impact.

However, tax law treats mileage reimbursements and vehicle disposition as two separate matters. While reimbursements compensate you for ongoing business use, they do not eliminate the tax consequences related to the vehicle itself.

When a Personal Vehicle Becomes a Business Asset

The IRS standard mileage rate includes a depreciation component. Each year you receive mileage reimbursements, a portion of those payments is treated as depreciation for tax purposes. This depreciation reduces your vehicle’s tax basis over time.

As a result:

• Your vehicle is considered business-use property

• Your adjusted basis decreases annually

• A gain or loss must be calculated upon sale or trade-in

This applies to:

• W-2 employees

• Corporate owner-employees

• Professionals reimbursed for business mileage

The Tax Impact at Sale or Trade-In

Due to changes in tax law, vehicle trade-ins are no longer eligible for like-kind exchange treatment. Instead, they are treated as taxable dispositions.

When a vehicle is sold or traded:

• The amount received is compared to the adjusted basis

• If the vehicle is sold for less than its remaining basis, a loss may result

• That loss may qualify as an ordinary deduction, not a capital loss

Such transactions are reported on Form 4797, Sales of Business Property.

Why Reimbursements Do Not Eliminate the Loss

Mileage reimbursements are designed to cover operating costs and a portion of wear and tear. They do not necessarily recover your full investment in the vehicle.

When a vehicle is disposed of for less than its adjusted basis, the tax code recognizes the unrecovered amount as a legitimate business loss — even when the taxpayer was fully reimbursed for mileage during ownership.

Key Points to Remember

• Mileage-reimbursed vehicles are treated as business assets

• The IRS mileage rate includes deemed depreciation

• Depreciation reduces the vehicle’s tax basis annually

• Sales and trade-ins are taxable events

• Losses may be fully deductible as ordinary losses

Professional Guidance Is Essential

This issue is frequently overlooked, even by experienced taxpayers. If you:

• Receive mileage reimbursements

• Have sold or traded a vehicle used for business

• Plan to replace a business-use vehicle

You should ensure the transaction is properly reviewed by a tax professional.

Conclusion

Mileage reimbursements do not conclude the tax analysis — they introduce it. Proper treatment of mileage-reimbursed vehicles can uncover valuable deductions and prevent costly oversights.

A proactive review can help ensure compliance while maximizing legitimate tax benefits.