Rev. Rul. 84-127

ISSUE

What amount should be reported on Form W 2 when an employer reimburses an employee for deductible automobile expenses?

FACTS

Situation 1. During 1983, X reimbursed its employees for business use of personal automobiles at the rate of 20.5 cents per mile. A, an employee of X, submitted travel vouchers showing 200 miles traveled for ordinary and necessary business purposes and claimed reimbursement of $41, which X paid. X also paid A wages of $1,000 during 1983.

Situation 2. Same as Situation 1, except that reimbursement was at the rate of 22.5 cents per mile and the reimbursement paid was $45.

Situation 3. Same as Situation 1, except that reimbursement was at the rate of 15 cents per mile and the reimbursement paid was $30.

LAW AND ANALYSIS

Section 6041(a) of the Internal Revenue Code requires that all persons engaged in a trade or business who make payment in the course of that trade or business to another person of rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed and determinable gains, profits and income of $600 or more in a year must file information returns.

Section 1.6041-2 of the Income Tax Regulations requires that wages be reported by the employer on Form W 2, Wage and Tax Statement. All other payments of compensation made by an employer to an employee in the course of the trade or business of the employer must also be reported on Form W 2 if the total of such payments and the amount of the employee's wages required to be reported on Form W 2 aggregates $600 or more in a calendar year. The employer may elect to report the additional compensation on a separate Form W 2.

Section 1.6041-3(i) of the regulations provides that information returns are not required under section 6041 of the Code to report advances, reimbursements, or charges for traveling or business expenses of an employee to the extent that the employee is required to account (within the meaning of the term "account" in section 1.162-17(b)(4) of the regulations) and does so account to the employer for the expenses.

Under section 1.162-17(b)(4) of the regulations, to "account" to an employer means to submit an expense account or other required written statement to the employer showing the business nature and the amount of the employee's expenses. The Commissioner may, under those regulations, approve reasonable business practices under which mileage, per diem, and similar allowances providing for ordinary and necessary business expenses in accordance with a fixed scale may be regarded as equivalent to an accounting to the employer.

Rev. Rul. 80-62, 1980-1 C.B. 63, as modified by Rev. Rul. 80-203, 1980-2 C.B. 101, and Rev. Rul. 84-51, 1984-15 I.R.B. 4, provides that, for expenses paid or incurred after December 31, 1982, if the employer grants an allowance not exceeding 20.5 cents per mile to an employee for ordinary and necessary transportation expenses, the arrangement will be considered to be an accounting to the employer within the meaning of sections 1.162-17(b) and 1.274-5 of the regulations.

For 1983, if an employee has provided the employer with a written statement showing the business nature of the employee's expenses and the employer has reimbursed the employee at a rate of 20.5 cents per mile or less, the requirement to "account" under section 1.162-17(b)(4) of the regulations would be satisfied and the exception to the requirement for information reporting under section 1.6041-3(i) would apply. Reimbursement by an employer at a rate exceeding 20.5 cents per mile, however, is not considered to be an accounting to the employer within the meaning of section 1.162-17(b)(4), because the reimbursement exceeds the fixed rate set by the Commissioner in Rev. Rul. 84-51 and, therefore, does not fall under the exception to the requirement for information reporting. Accordingly, any reimbursement made by an employer at a rate greater than the optional standard mileage rate prescribed by the Internal Revenue Service must be reported in full to employees on Form W 2.

HOLDINGS

Situation 1. X should report $1,000 in wages on Form W 2. X is not required to report the $41 reimbursement.

Situation 2. X should report $1,000 in wages and $45 in other compensation on one Form W 2. Alternatively, X may file two Forms W 2, one showing $1,000 in wages and a second Form W 2 showing $45 in other compensation.

However, the $45 reimbursement is not "wages" for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment tax Act (FUTA), or federal income tax withholding. See sections 31.3121(a) 1(h), 31.3306(b) 1(h), and 31.3401(a) 1(b)(2) of the Employment Tax Regulations; and Central Illinois Public Service Co. v. United States, 435 U.S. 21 (1978), 1978-1 C.B. 310. Accordingly, X need not withhold income tax or FICA tax on the reimbursement.

The reimbursement in this situation is not considered an accounting to the employer by A. Consequently, the rules of section 1.162-17(c) of the regulations apply in determining the proper manner for reporting the reimbursement and the ordinary and necessary business expenses on A's tax return. This means that A must report the amount of the reimbursement shown on Form W 2 as income on Form 1040. Then A may deduct expenses for business use of the automobile from income. A may do so by either claiming the actual expense for business use of the automobile or the expense as computed by the 20.5 cents standard mileage rate on Form 2106, Employee Business Expenses, or a similar statement, which must be attached to A's Form 1040.

Situation 3. X should report $1,000 in wages on Form W 2. X is not required to report the $30 reimbursement.

For the income tax treatment of reimbursements to employees in Situations 1 and 3 (where automobile expenses are reimbursed at a rate equal to or less than expenses), see sections 1.162-17(b)(1) and (3) of the regulations. See section 1.162-17(b)(2) where automobile expenses are reimbursed in excess of expenses.