How You Should Allocate Mileage Reimbursement

If you do any driving for your job and use your personal vehicle to do so, chances are that you are familiar with mileage reimbursement.  Basically, a company should pay you for the use of your personal automobile while doing company business.  My understanding is that it is not a requirement, but is fairly standard practice.

The general rules I’ve seen is that the mileage must be for company purposes, on company time, and that you have to back out mileage that you would have driven anyways.  So, if your normal commute to the office is 10 miles each way, but you are sent out to a location 30 miles away, your first 10 miles would not be eligible for reimbursement, with the thinking that you would be driving that no matter what.

There seems to be a lot of different rules that each company or organization is allowed to follow.  One thing that is often used as a standard is the rate at which mileage is reimbursed.  Most companies that I’ve worked for have used the IRS rate, which is set once per year.  I would imagine that there are tax implications for the organizations, and that using the rate provided offers the maximum benefit to companies who offer this.

The current rate for 2014 is $0.56 per mile.

The Big Mileage Mistake Almost Everybody Makes

There’s one mistake that many people make.  They look at the rate and think that it applies only to gas, and they figure to use it as a money maker.

I’m here to tell you that isn’t true, and if you’re doing it that way, you need to stop.  Now.

The Math Behind The Mistake

Using my earlier example, say you take a 30 mile round trip drive one day, whereas your normal trip was 10 miles.  That would leave you eligible for 20 miles each way, or a total of 40 miles.

When you submit your request, you’ll then get a reimbursement of $11.20 based on today’s rates.

Many people will then look at their mileage, and look at the actual ‘cost’.

Say gas is $3.50 per gallon and your car gets 25 MPG.  You would burn 1.6 gallons of gas to cover the extra 40 miles, which would work out to a cost of $5.60.

Since you’re getting $11.20, you think, cool, I just got paid double for what I just drove.

mb-2014-07carFor people that get reimbursed for a lot of mileage, this can work out to a pretty big number.

There’s a couple of reasons that this is a big mistake.

  1. Gas is not the only cost involved – Receiving reimbursement is to cover your entire cost of driving.  This includes not only the gas you pay for, but also goes toward other costs involved.  Think about this.  If you drive a lot of extra miles for work, you’re going to need more frequent oil changes.  You’re going to need tire replacements faster.  In fact, the car will likely need to be replaced earlier than if you just drove a standard commute.  One 20 mile day isn’t going to make much impact here, but if you drive thousands of miles per year for work, these costs will end up being significant.  If you don’t allocate the reimbursement money accordingly, you will end up scrambling when these costs get realized.  And, trust me, they will.
  2. You start thinking of the extra as income – If you get mileage checks on a regular basis, the natural behavior is to start allocating that as part of your paycheck.  No big deal, right?  Wrong.  Not only will this bite you for the reasons above, there might come a time when the mileage reimbursement is no longer there.  If you no are no longer required to make that longer commute, that will reduce your costs, but if you’re not careful, it will reduce your supposed income by a greater amount. If you’d started relying on that regular reimbursement, you could end up scrambling.

The Correct Approach To Mileage Reimbursement

I have a pretty strict rule for how I allocate my mileage reimbursement.  The rule is simple: It all goes towards elements related to my car.  If you break it out into three categories, you’ll be covered:

  • Gas
  • Car Repairs
  • New Car

The simple rule I use is to allocate it one-third toward each. If I get $90 in reimbursement, I’ll pay $30 toward the credit card, which has gas costs, and I’ll take $60 and put it into our savings accounts, where I have a ‘fund’ (tracked exclusively through my Excel spreadsheet) each for New Car and Car Repairs.

No matter how you track this, the important thing is that you put the money aside accordingly.

You can even split the percentages.  In my example above, gas was roughly 50% of the cost.  If this is the case for you, then take 50% and pay for the gas, and split the rest between Repairs and New Car.  Whatever.  As long as you don’t start ‘spending’ the extra, you’re in good shape.  If you’re spending the extra, then you’re doing it wrong, because as you now see, there really isn’t extra.

Readers, how do you handle the divvying up of your mileage reimbursements?

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