SERVICE ANNOUNCES 1990 STANDARD MILEAGE RATES FOR BUSINESS, CHARITABLE, MEDICAL, OR MOVING EXPENSE PURPOSES.

Rev. Proc. 89-66

SECTION 1. PURPOSE

This revenue procedure provides optional standard mileage rates for employees, self-employed individuals, or other taxpayers to use in computing the deductible costs paid or incurred on or after January 1, 1990, of operating a passenger automobile for business, charitable, medical, or moving expense purposes. Use of the standard mileage rates is not mandatory and a taxpayer may use actual allowable expenses if adequate records or other sufficient evidence are maintained for proper substantiation. 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 section 1.274-5T of the temporary Income Tax Regulations when 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 such expenses.

SEC. 2. BACKGROUND

01 Section 162(a) of the Internal Revenue Code 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 a passenger automobile to the extent that it is used in a trade or business. However, under section 262, no portion of the operating cost that is attributable to personal use is deductible.

02 Section 274(d) of the Code provides, in part, that no deduction shall be allowed under section 162 with respect to any listed property (as defined in section 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. The section 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 such regulations.

03 Section 1.274-5T(g) of the temporary regulations, in part, grants the Commissioner the authority to prescribe rules relating to mileage allowances for ordinary and necessary expenses of local travel and transportation away from home. Pursuant to this grant of authority, the Commissioner may prescribe rules under which such allowances, if in accordance with reasonable business practice, will be regarded (1) as equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of such travel and transportation expenses for purposes of section 1.274-5T(c), and (2) as satisfying the requirements of an adequate accounting to the employer of the amount of such expenses for purposes of section 1.274-5T(f).

04 Section 62(a)(2)(A) of the Code allows an employee, in determining adjusted gross income, a deduction for the expenses allowed by Part VI (section 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.

05 Section 62(c) of the Code provides that an arrangement will not be treated as a reimbursement or other expense allowance arrangement for purposes of section 62(a)(2)(A) if --

(1) such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the payor, or

(2) such arrangement 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 shall not apply to any expense to the extent that, under the grant of regulatory authority prescribed in section 274(d), the Commissioner has provided that substantiation is not required for such expense.

06 Under section 1.62-2T(c)(1) of the temporary regulations, a reimbursement or other expense allowance arrangement satisfies the requirements of section 62(c) of the Code if it meets the requirements of business connection, substantiation, and returning amounts in excess of expenses as specified in the regulations. Section 1.62-2T(e)(2) specifically provides that substantiation of certain business expenses in accordance with rules prescribed under the authority of section 1.274-5T(g) will be treated as substantiation of the amount of such expenses for purposes of section 1.62-2T. Under section 1.62-2T(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 such an allowance that exceeds the amount of the employee's expenses deemed substantiated pursuant to rules prescribed under section 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 such an allowance that relates to miles of travel not substantiated.

SEC. 3. 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 passenger automobiles owned by them (including vans, pickups, or panel trucks) for business purposes, or by taxpayers in computing the deductible costs of operating passenger automobiles for charitable, medical, or moving expense purposes.

02 TRANSPORTATION EXPENSES. The term "transportation expenses" means the expenses of operating a passenger automobile 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 specified in section 1.62-2T(c)(1) of the temporary regulations and that

(1) is paid with respect to the ordinary and necessary business expenses incurred, or which the payor reasonably anticipates will be incurred, by an employee for transportation expenses in connection with the performance of services as an employee,

(2) is reasonably calculated not to exceed the amount of the expenses or the anticipated expenses, and

(3) is paid at the applicable standard mileage rate, at another rate per mile, or in accordance with any other Service- specified rate or schedule.

SEC. 4. BUSINESS STANDARD MILEAGE RATE

01 IN GENERAL. The standard mileage rate for transportation expenses paid or incurred on or after January 1, 1990, is 26 cents per mile for all miles of use for business purposes. This business standard mileage rate will be adjusted annually (to the extent warranted) by the Service, and any such adjustment will be applied prospectively.

02 USE OF THE BUSINESS STANDARD MILEAGE RATE. A taxpayer may, on a yearly basis, 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 computed using the standard mileage rate for business miles is in lieu of operating and fixed costs of the automobile allocable to business purposes. Such items as depreciation, maintenance end repairs, tires, gasoline (including all taxes thereon), oil, insurance, and registration fees are included in operating and fixed costs.

04 PARKING FEES, TOLLS, INTEREST, AND TAXES. Parking fees and tolls attributable to use of the automobile for business purposes may be deducted as separate items. Likewise, interest relating to the purchase of the automobile as well as state and local taxes (other than those included in the cost of gasoline) may be deducted as separate items, but only to the extent that such interest and taxes are allowable deductions under section 163 or 164 of the Code, respectively. If the automobile 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. However, section 163(h)(2)(A) expressly provides that interest is nondeductible personal interest when it is paid or accrued on indebtedness properly allocable to the trade or business of performing services as an employee. Section 164 also 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 such property.

05 DEPRECIATION. For automobiles placed in service for business purposes after December 31, 1979, 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 7 cents a mile for 1980 and 1981, 7.5 cents a mile for 1982, 8 cents a mile for 1983, 1984, and 1985, 9 cents a mile for 1986, 10 cents a mile for 1987, 10.5 cents a mile for 1988, and 11 cents a mile for 1989 and 1990, for those years in which the standard mileage rate was used. If actual costs were used for one or more of those years, the rates above will not apply to any year in which such costs were used. The depreciation described in this section 4.05 will reduce the basis of the automobile (but not below zero) in determining adjusted basis as required by section 1016 of the Code.

06 LIMITATIONS.

(1) The business standard mileage rate may not be used to compute the deductible expenses of (a) vehicles used for hire, such as taxicabs, (b) two or more automobiles used simultaneously (such as in fleet operations), or (c) any vehicle that is leased, rather than owned, by the taxpayer.

(2) The business standard mileage rate may not be used if (a) the automobile has previously been depreciated using a method other than straight-line for its estimated useful life, (b) additional first-year depreciation has been claimed, or (c) the taxpayer has used the Accelerated Cost Recovery System (ACRS) under section 168 of the Code. By using the business standard mileage rate, the taxpayer has elected to exclude the automobile from ACRS pursuant to section 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 automobile's estimated useful life (subject to the applicable depreciation deduction limitations under section 280F for any passenger automobile).

SEC. 5. RURAL MAIL CARRIER SPECIAL MILEAGE RATE

01 SPECIAL MILEAGE RATE. For taxable years beginning after December 31, 1987, section 6008 of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, 102 Stat. 3342, allows employees of the United States Postal Service to use a special mileage rate in computing the amount allowable as a deduction for business use of an automobile in performing qualifying services. Qualifying services are services involving the collection and delivery of mail on a "rural route," as that term is defined by the Postal Service. The special mileage rate is equal to 150 percent of the business standard mileage rate, and is 39 cents per mile for transportation expenses paid or incurred on or after January 1, 1990 (150 percent of the business standard mileage rate of 26 cents per mile). The special mileage rate applies to all business use of an automobile while performing qualifying services. It will be adjusted annually (to the extent warranted) by the Service to reflect changes in the business standard mileage rate, and any such adjustment will be applied prospectively.

02 DEPRECIATION. In determining the adjusted basis of an automobile used to perform qualifying services, depreciation will be computed as provided in section 4.05 above, except as provided in section 5.03 below.

03 SPECIAL DEPRECIATION RULES. The special mileage rate is not available for any automobile if, for any taxable year beginning after December 31, 1987, the employee claims depreciation for such automobile. For this purpose, claiming depreciation means the deduction of any amount under section 167, 168, or 179 of the Code (including any such deduction attributable to use in a trade or business that does not involve the performance of qualifying services). The availability of the special mileage rate is not affected by depreciation claimed for taxable years beginning before January 1, 1988. Thus, the special mileage rate is available even if the automobile was fully depreciated in taxable years beginning before January 1, 1988, and regardless of the year the automobile was placed in service.

04 RURAL MAIL CARRIER SPECIAL MILEAGE RATE IN LIEU OF OPERATING AND FIXED COSTS. The rules provided under section 4.03 above also apply to use of the special mileage rate.

05 PARKING FEES, TOLLS, INTEREST, AND TAXES. The rules provided under section 4.04 above also apply to the use of the special mileage rate.

SEC. 6. CHARITABLE, MEDICAL, AND MOVING STANDARD MILEAGE RATES

01 CHARITABLE. Section 170(j) of the Code provides a standard mileage rate of 12 cents per mile for purposes of computing the charitable deduction for use of a passenger automobile in connection with rendering gratuitous services to a charitable organization under section 170.

02 MEDICAL AND MOVING. The standard mileage rate is 9 cents per mile for use of a passenger automobile (a) to obtain medical care under section 213 of the Code, or (b) as part of a move for which the expenses are deductible under section 217. The standard mileage rates for medical and moving transportation expenses will be adjusted annually (to the extent warranted) by the Service, and any such adjustment will be applied prospectively.

03 CHARITABLE, MEDICAL, OR MOVING EXPENSE STANDARD MILEAGE RATE 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 operating expenses (including gasoline and oil) of the automobile allocable to such purposes. Other costs for such items as depreciation, maintenance and repairs, tires, insurance, and registration fees are not deductible, and are not included in such standard mileage rates.

04 PARKING FEES, TOLLS, INTEREST, AND TAXES. Parking fees and tolls attributable to the use of the automobile for charitable, medical, or moving expense purposes may be deducted as separate items. Likewise, interest relating to the purchase of the automobile as well as state and local taxes (other than those included in the cost of gasoline) may be deducted as separate items, but only to the extent that such interest and taxes are allowable deductions under section 163 or 164 of the Code, respectively.

SEC. 7. ACCOUNTING TO EMPLOYER

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 equal to the lesser of the amount paid under the mileage allowance or the applicable standard mileage rate in section 4.01 or 5.01 above multiplied by the number of business miles substantiated by the employee.

02 If the amount of an expense is deemed substantiated under the rule provided in section 7.01 above, 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), (b)(6) (listed property, which includes passenger automobiles and any other property used as a means of transportation), and (c) of section 1.274-5T of the temporary regulations, the employee is deemed to satisfy the adequate accounting requirements of section 1.274-5T(f) as well as the requirement to substantiate by adequate records or other sufficient evidence for purposes of section 1.274-5T(c).

03 An arrangement providing mileage allowances will be treated as satisfying the requirement of section 1.62-2T(f)(2) of the temporary regulations with respect to returning amounts in excess of expenses if the employee is required to return any portion of such an allowance that relates to miles of travel not substantiated, even though the arrangement does not require the employee to return the portion of such an allowance that exceeds the amount of the employee's expenses deemed substantiated. For example, assume a payor provides an employee an advance mileage allowance of $60 based on an anticipated 200 business miles at 30 cents per mile (at a time when the applicable business standard mileage rate is 26 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 is attributable to the 80 unsubstantiated business miles ($24), 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 7.01 above ($31.20) 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 below in section 7.05.

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 applicable standard mileage rate multiplied by the number of business miles substantiated by the employee in accordance with section 7.02 above. See section 1.274-5T(f)(2)(i) of the temporary regulations. In addition, such portion of the allowance is treated as paid under an accountable plan, is not required to be reported on the employee's Form W-2, and is exempt from the withholding and payment of employment taxes. See section 1.62- 2T(c)(2) and (c)(4)

05 An employee is required to include in gross income only the portion of a mileage allowance received from a payor that exceeds the applicable standard mileage rate multiplied by the number of business miles substantiated by the employee in accordance with section 7.02 above. See section 1.274-5T(f)(2)(ii) of the temporary regulations. In addition, the excess portion of the allowance is treated as paid under a nonaccountable plan, is required to be reported on th employee's Form W-2, and is subject to withholding and payment of employment taxes. See section 1.62-2T(c)(3)(ii) and (c)(5).

06 If the amount of the expenses that is deemed substantiated under the rules provided in section 7.01 above is less than the amount of the employee's business transportation expenses, the employee 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 section 1.274-5T(f)(2)(iii) of the temporary regulations. The itemized deduction is subject to the 2-percent floor on miscellaneous itemized deductions provided in section 67.

SEC. 8. EFFECT ON OTHER DOCUMENTS

01 Rev. Proc. 82-61, 1982-2 C.B. 849, as modified by Rev. Proc. 83-74, 1983-2 C.B. 593, Rev. Proc. 84-72, 1984-2 C.B. 735, Rev. Proc. 85-49, 1985-2 C.B. 716, Rev. Proc. 86-38, 1986-2 C.B. 701, Rev. Proc. 87-49, 1987-2 C.B. 646, Rev. Proc. 88-52, 1988-2 C.B. 711, and Rev. Proc. 89-62, 1989-47 I.R.B. 12, which sets forth the applicable business standard mileage rates and rules for transportation expenses, is hereby superseded for such expenses paid or incurred on or after January 1, 1990.

02 Notice 89-49, 1989-18 I.R.B. 17, which sets forth the special mileage rates and rules for transportation expenses of rural mail carriers, is hereby superseded for qualifying transportation expenses paid or incurred on or after January 1 1990.

03 Rev. Rul. 80-62, 1980-1 C.B. 63, as modified by Rev. Rul. 80- 203, 1980-2 C.B. 101, Rev. Rul. 84-51, 1984-1 C.B. 90, Rev. Rul. 85- 155, 1985-2 C.B. 89, Rev. Rul. 87-93, 1987-2 C.B. 81, Rev. Rul. 88- 92, 1988-2 C.B. 39, and Rev. Rul. 89-120, 1989-47 I.R.B. 5, which in part sets forth the deemed substantiation rules for a mileage allowance for transportation expenses, is hereby superseded for mileage allowances paid to an employee on or after January 1, 1990, with respect to transportation expenses paid or incurred on or after January 1, 1990.

04 Rev. Rul. 84-127, 1984-2 C.B. 246, which sets forth the reporting and employment tax withholding and payment rules for mileage allowances paid with respect to transportation expenses, is hereby superseded as follows:

(1) REPORTING. For mileage allowances paid to an employee on or after January 1, 1990, with respect to transportation expenses paid or incurred on or after January 1, 1990.

(2) EMPLOYMENT TAX WITHHOLDING AND PAYMENT. For mileage allowances paid to an employee on or after July 1, 1990, with respect to transportation expenses paid or incurred on or after July 1, 1980.

DRAFTING INFORMATION

The principal author of this revenue procedure is Leonard H. Friedman of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Friedman on (202) 566-4486 (not a toll-free call).