Part III Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability. (Also Part I, §§ 62, 162, 170, 213, 217, 274, 1016; 1.62-2, 1.162-17, 1.170A-1, 1.213-1, 1.217-2, 1.274-5, 1.1016-3.)

Rev. Proc. 2007-70

SECTION 1. PURPOSE This revenue procedure updates Rev. Proc. 2006-49, 2006-47 I.R.B. 936, and provides optional standard mileage rates for employees, self-employed individuals, or other taxpayers to use in computing the deduc tible costs of operating an automobile for business, charitable, medical, or movi ng expense purposes. This revenue procedure also provides rules under which the amount of ordinary and necessary expenses of local travel or transportation away from home t hat are paid or incurred by an employee are deemed substantiated under § 1.274- 5 of the Income Tax Regulations if 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 the expenses. Use of a method of substantiation described in this revenue procedure is not mandatory and a taxpayer may use actual allowable ex penses if the taxpayer maintains adequate2 records or other sufficient evidence for pr oper substantiation. The Internal Revenue Service prospectively adjusts the busine ss and medical and moving standard mileage rates annually (to the extent warranted). SECTION 2. SUMMARY OF STANDARD MILEAGE RATES
.01 Standard mileage rates (1) Business (section 5 below) 50.5 cents per mile (2) Charitable contribution (section 7 below) 14 cents per mile (3) Medical and moving (section 7 below) 19 cents per mile
.02 Determination of standard mileage rates . The business and medical and moving standard mileage rates reflected in this revenue procedure are based on an annual study of the fixed and variable cost s of operating an automobile conducted on behalf of the Service by an independent cont ractor. The charitable contribution standard mileage rate is provided in § 170( i) of the Internal Revenue Code. SECTION 3. BACKGROUND AND CHANGES .01 Section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable y ear in carrying on any trade or business. Under that provision, an employee or self -employed individual may deduct the cost of operating an automobile to the ex tent that it is used in a trade or business. However, under § 262, no portion of the co st of operating an automobile that is attributable to personal use is deductible. .02 Section 274(d) provides, in part, that no deduction is allowed under § 162 with respect to any listed property (as defined in § 280F(d)(4) to include passenger automobiles and any other property used as a means of transportation) unless the3 taxpayer complies with certain substantiati on requirements. Section 274(d) 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 the regulations. .03 Section 1.274-5(j), in part, grants t he Commissioner of Internal Revenue the authority to establish a method under whic h a taxpayer may use mileage rates to substantiate, for purposes of § 274(d), t he amount of the ordinary and necessary expenses of using a vehicle for local tr ansportation and transportation to, from, and at the destination while traveling away from home. .04 Section 1.274-5(g), in part, grant s the Commissioner the authority to prescribe rules relating to mileage allowanc es for ordinary and necessary expenses of using a vehicle for local transportation and tr ansportation to, from, and at the destination while traveling away from home. Pursuant to this grant of authority, the Commissioner may prescribe rules under which the allow ances, if in accordance with reasonable business practice, will be regarded as (1) equi valent to substantiation, by adequate records or other sufficient evidence, of the amount of the travel and transportation expenses for purposes of § 1.274-5(c), and (2) satisfying the requirements of an adequate accounting to the employer of the amount of the expenses for purposes of § 1.274-5(f). .05 Section 62(a)(2)(A) allows an employee, in determining adjusted gross income, a deduction for the expenses allowed by Part VI (§ 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 other4 expense allowance arrangement with a payor. .06 Section 62(c) provides that an arrangement will not be treated as a reimbursement or other expense allowance a rrangement for purposes of § 62(a)(2)(A) if it-- (1) does not require the employee to substantiate the expenses covered by the arrangement to the payor, or (2) provides the employee with the right to retain any amount in excess of the substantiated expenses co vered under the arrangement. Section 62(c) further provides that the s ubstantiation requirement s described therein do not apply to any expense to the extent tha t, under the grant of r egulatory authority in § 274(d), the Commissioner has provided that substantiation is not required for the
expense. .07 Under § 1.62-2(c), a reimbursement or other expense allowance arrangement satisfies the requirements of § 62(c) if it meets the requi rements of business connection, substantiation, and returning amounts in ex cess of expenses as specified in the regulations. If an arrangement meets these requirements, all amounts paid under the arrangement are treated as paid under an accountable plan and are excluded from income and wages. If an arrangement does not meet these requirements, all amounts paid under the arrangement are treated as paid under a nonaccountable plan and are included in the employee's gross income, mu st be reported as wages or compensation on the employee's Form W-2, and are subj ect to the withholding and payment of employment taxes. Section 1.62-2(e)(2) spec ifically provides that substantiation of certain business expenses in accordance with rules prescribed under the authority of5 prescribed under the authority of § 1.274-5(g) will be treated as substantiation of the amount of the expenses for purposes of § 1.62-2. Under § 1.62-2(f)(2), the Commissioner may prescribe rules under which an arrangement providing mileage allowances is treated as satisfying the requi rement of returning amounts in excess of expenses, even though the arrangement does not require the employee to return the portion of the allowance that relates to mile s of travel substantiated and that exceeds the amount of the employee's expenses deemed substantiated pursuant to rules prescribed under § 274(d), provided the allo wance is reasonably calculated not to exceed the amount of the employee's ex penses or anticipated expenses and the employee is required to return any portion of t he allowance that relates to miles of travel not substantiated. .08 Section 1.62-2(h)(2)(i)(B) provides t hat if a payor pays a mileage allowance under an arrangement that meets t he requirements of § 1.62-2(c )(1), the portion, if any, of the allowance that relates to miles of travel substantiated in accordance with § 1.62-2(e), that exceeds the amount of the employee's expenses deemed substantiated for the travel pursuant to rules prescribed under § 274(d) and § 1.274-5(g), and that the empl oyee is not required to return, is subject to withholding and payment of employment taxes. See §§ 31.3121(a)-3, 31.3231(e)-1(a)(5), 31.3306(b)-2, and 31.3401(a)-4 of the Employ ment Tax Regulations. Because the employee is not required to return this excess portion, the reasonable period of time provisions of § 1.62-2(g) (relating to the retu rn of excess amounts) do not apply to this excess portion. .09 Under § 1.62-2(h)(2)(i)(B)(4), the Commissioner may provide special rules6 regarding the timing of withholding and paym ent of employment taxes on mileage allowances. .10 Sections 9.09 and 10.03 of this rev enue procedure refer to Rev. Rul. 2006- 56, 2006-46 I.R.B. 874, which describes circ umstances when a payor's reimbursement or other expense allowance arrangement evidenc es a pattern of abuse of the rules of § 62(c) and the regulations thereunder. SECTION 4. DEFINITIONS
.01 Standard mileage rate . The term "standard mileage rate" means the applicable amount provided by the Servic e for optional use by employees or self-employed individuals in computing t he deductible costs of operating automobiles (including vans, pickups, or panel trucks) they own or lease for business purposes, or by taxpayers in computing the deductible cost s of operating automobiles for charitable, medical, or moving expense purposes. .02 Transportation expenses . The term "transportation expenses" means the expenses of operating an 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 is: (1) paid with respect to the ordinary and necessary business expenses incurred, or that the payor reasonably anticipates will be incurred, by an employee for transportation expenses in connection with the performance of services as an employee of the employer, (2) reasonably calculated not to exceed the amount of the expenses or the anticipated expenses, and7 (3) paid at the applicable standard mil eage rate, a flat rate or stated schedule, or in accordance with any other Service-specified rate or schedule.
.04 Flat rate or stated schedule . A mileage allowance is paid at a flat rate or stated schedule if it is provided on a unifo rm and objective basis with respect to the expenses described in section 4.03 of this revenue procedure. The allowance may be paid periodically at a fixed rate, at a cents- per-mile rate, at a variable rate based on a stated schedule, at a rate that combines any of these rates, or on any other basis that is consistently applied and in accordance with reasonable business practice. Thus, for example, a periodic payment at a fixed ra te to cover the fixed costs (including depreciation (or lease payments), insurance, registration and license fees, and personal property taxes) of driving an automobile in connection with the performance of services as an employee of the employer, coupled wit h a periodic payment at a cents-per-mile rate to cover the variable costs (including gasoline and all taxes thereon, oil, tires, and routine maintenance and repairs) of using an automobile for those purposes, is an allowance paid at a flat rate or stated sc hedule. Likewise, a periodic payment at a variable rate based on a stated schedule for different locales to cover the costs of driving an automobile in connection with the per formance of services as an employee is an allowance paid at a flat rate or stated schedule. SECTION 5. BUSINESS STANDARD MILEAGE RATE
.01 In general . The standard mileage rate for transportation expenses is 50.5 cents per mile for all miles of use for business purposes.
.02 Use of the business standard mileage rate . A taxpayer may use the business standard mileage rate with respect to an automob ile that is either owned or leased by8 the taxpayer. A taxpayer generally may deduct an amount equal to either the business standard mileage rate times the number of busi ness miles traveled or the actual costs (both fixed and variable) paid or incurred by t he taxpayer that are allocable to traveling those business miles. .03 Business standard mileage rate in lieu of fixed and variable costs . A deduction using the business standard mileage ra te is computed on a yearly basis and is in lieu of all fixed and variable costs of the automobile allocable to business purposes (except as provided in section 9.06 of this revenue procedure). Items such as depreciation (or lease payments), maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, and license and r egistration fees are included in fixed and variable costs for this purpose.
.04 Parking fees, tolls, interest, and taxes . Parking fees and tolls attributable to use of the automobile for business purpos es may be deducted as separate items. Likewise, interest relating to the purchase of the automobile as well as state and local personal property taxes may be deducted as s eparate items, but onl y to the extent allowable under § 163 or § 164, respectively. Section 163(h)(2)(A) expressly provides that interest is nondeductible personal interest if it is paid or accrued on indebtedness properly allocable to the trade or business of performing services as an employee. Section 164 expressly provides that state and local taxes that are paid or accrued by a taxpayer in connection with an acquisition or disposition of property are treated as part of the cost of the acquired property or as a reduction in the amount realized on the disposition of the property. If the autom obile is operated less than 100 percent for business purposes, an allocation is required to determine the business and nonbusiness9 portion of the taxes and interest deduction allowable.
.05 Depreciation . For owned automobiles placed in service for business purposes, and for which the business standard mileage rate has been used for any year, depreciation is considered to have been allo wed at the rate of 16 cents per mile for 2003 and 2004, 17 cents per mile for 2005 and 2006, 19 cents per mile for 2007, and 21 cents per mile for 2008 for those years in which the business standard mileage rate was used. If actual costs were used for one or more of those years, these rates do not apply to any year in which actual costs were used. The depreciation described above reduces the basis of the automobile (but not below zero) in determining adjusted basis as required by § 1016.
.06 Limitations

. (1) The business standard mileage rate may not be used to compute the deductible expenses of (a) automobiles used for hi re, such as taxicabs, or (b) five or more automobiles owned or leased by a taxpayer and used simultaneously (such as in fleet operations). (2) The business standard mileage rate may not be used to compute the deductible business expenses of an automobile leased by a taxpayer unless the taxpayer uses either the business standard mileage rate or a fixed and variable rate allowance (FAVR allowance) (as provided in section 8 of this revenue procedure) to compute the deductible business expenses of the automobile for the entire lease period (including renewals). For a lease commenc ing on or before December 31, 1997, the "entire lease period" means the portion of the lease period (including renewals) remaining after that date.10 (3) The business standard mileage rate may not be used to compute the deductible expenses of an automobile for which the taxpayer has (a) claimed depreciation using a method other than straight -line for its estimated useful life, (b) claimed a § 179 deduction, (c) claimed t he special depreciation allowance under § 168(k), or (d) used the Accelerated Co st Recovery System (ACRS) under former § 168 or the Modified Accelerated Cost Recovery System (MACRS) under current § 168. By using the business standard mileage rate, the taxpayer has elected to exclude the automobile (if owned) from MACRS pursuant to § 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 autom obile's remaining estimated useful life (subject to the applicable depreciati on deduction limitations under § 280F). (4) The business standard mileage rate and this revenue procedure may not be used to compute the amount of t he deductible automobile expenses of an employee of the United States Postal Servic e incurred in performing services involving the collection and delivery of mail on a rural route if the employee receives qualified reimbursements (as defined in § 162(o)) for the expenses. See § 162(o) for the rules that apply to these qua lified reimbursements. SECTION 6. RESERVED SECTION 7. CHARITABLE AND MEDICA L AND MOVING STANDARD MILEAGE RATES
.01 Charitable . Section 170(i) provides a standard mileage rate of 14 cents per mile for purposes of computing the char itable contribution deduction for use of an automobile in connection with render ing gratuitous services to a charitable organization11 under § 170.
.02 Medical and moving . The standard mileage rate is 19 cents per mile for use of an automobile (1) to obtain medical care de scribed in § 213, or (2) as part of a move for which the expenses are deductible under § 217.
.03 Charitable or medical and moving standard mileage rates in lieu of variable
expenses . A deduction computed using the applicable standard mileage rate for charitable, medical, or moving expense m iles is in lieu of all variable expenses (including gasoline and oil) of the automobile allocable to those purposes. Costs for items such as depreciation (or lease payment s), insurance, and license and registration fees are not deductible, and are not included in the charitable or medical and moving 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. Interest rela ting to the purchase of the automobile and state and local personal property taxes are not deductible as charitable, medical, or moving expenses, but they may be deducted as separate items to the extent allowable under § 163 or § 164, respectively. SECTION 8. FIXED AND VARIABLE RATE ALLOWANCE
.01 In general

. (1) The ordinary and necessary expenses paid or incurred by an employee in driving an automobile owned or leased by the employee in connection with the performance of services as an employee of the employer are deemed substantiated (in an amount determined under section 9 of this revenue procedure) when a payor12 reimburses those expenses with a mileage a llowance using a flat rate or stated schedule that combines periodic fixed and va riable rate payments that meet all the requirements of section 8 of this re venue procedure (a FAVR allowance). (2) The amount of a FAVR allowance must be based on data that (a) is derived from the base locality, (b) reflects retail prices paid by consumers, and (c) is reasonable and statistically defensible in appr oximating the actual expenses employees receiving the allowance would incur as owners of the standard automobile.
.02 Computation of FAVR allowance

. (1) FAVR allowance . A FAVR allowance includes periodic fixed payments and periodic variable payments. A payor may maintain more than one FAVR allowance. A FAVR allowance that uses the same pay or, standard automobile (or an automobile of the same make and model that is compar ably equipped), retention period, and business use percentage is considered one FAVR allow ance, even though other features of the allowance may vary. A FAVR allowance also includes any optional high mileage payments; however, optional high mileage pay ments are included in the employee's gross income, are reported as wages or other compensation on the employee's Form W-2, and are subject to withholding and paym ent of employment taxes when paid. See section 9.05 of this revenue procedure. An optional high mileage payment covers the additional depreciation for a standard automobile attributable to business miles driven and substantiated by the employee for a cal endar year in excess of the annual business mileage for that year. If an employee is covered by the FAVR allowance for less than the entire calendar year, the annual busi ness mileage may be prorated on a monthly basis for purposes of the preceding sentence.13 (2) Periodic fixed payment . A periodic fixed payment covers the projected fixed costs (including depreciation (or leas e payments), insurance, registration and license fees, and personal property taxes) of driving the standard automobile in connection with the performance of services as an employee of the employer in a base locality, and must be paid at least quarterly. A periodic fixed payment may be computed by (a) dividing the total projected fixed cost s of the standard automobile for all years of the retention period, determined at the beginning of the retent ion period, by the number of periodic fixed payments in the retenti on period, and (b) multiplying the resulting amount by the business use percentage. (3) Periodic variable payment . A periodic variable payment covers the projected variable costs (including gasoline and all taxes thereon, oil, tires, and routine maintenance and repairs) of driving a st andard automobile in connection with the performance of services as an employee of t he employer in a base locality, and must be paid at least quarterly. The rate of a peri odic variable payment for a computation period may be computed by dividing the total pr ojected variable costs for the standard automobile for the computation period, det ermined at the beginning of the computation period, by the computation period mileage. A computati on period can be any period of a year or less. Computation period mil eage is the total mileage (business and personal) a payor reasonably projects a standard autom obile will be driven during a computation period and equals the retention mileage divided by the number of computation periods in the retention period. For each business m ile substantiated by the employee for the computation period, the periodic variable paym ent must be paid at a rate that does not exceed the rate for that computation period.14 (4) Base locality . A base locality is the particular geographic locality or region of the United States in which the costs of driving an automobile in connection with the performance of services as an empl oyee of the employer are generally paid or incurred by the employee. Thus, for purposes of determining the amount of fixed costs, the base locality is generally the geographic lo cality or region in which the employee resides. For purposes of determining the amount of variable costs, the base locality is generally the geographic locality or region in which the employee drives the automobile in connection with the performance of serv ices as an employee of the employer. (5) Standard automobile . A standard automobile is the automobile selected by the payor on which a specific FAVR allowance is based. (6) Standard automobile cost . The standard automobile cost for a calendar year may not exceed 95 percent of t he sum of (a) the retail dealer invoice cost of the standard automobile in the base loca lity, and (b) state and local sales or use taxes applicable on the purchase of the autom obile. Further, the standard automobile cost may not exceed $27,500. (7) Annual mileage . Annual mileage is the total mileage (business and personal) a payor reasonably projects a standard automobile will be driven during a calendar year. Annual mileage equals the annual business mileage divided by the business use percentage. (8) Annual business mileage . Annual business mileage is the mileage a payor reasonably projects a standard autom obile will be driven by an employee in connection with the performance of services as an employee of the employer during the calendar year, but may not be less than 6, 250 miles for a calendar year. Annual15 business mileage equals the annual mileage multip lied by the business use percentage. (9) Business use percentage . A business use percentage is determined by dividing the annual business mileage by the annual mileage. The business use percentage may not exceed 75 percent. In lieu of demonstrating the reasonableness of the business use percentage based on record s of total mileage and business mileage driven by the employees annually, a payor ma y use a business use percentage that is less than or equal to the following percentages for a FAVR allowance that is paid for the following annual business mileage: Annual business mileage Business use percentage 6,250 or more but less than 10,000 45 percent 10,000 or more but less than 15,000 55 percent 15,000 or more but less than 20,000 65 percent 20,000 or more 75 percent (10) Retention period . A retention period is the period in calendar years selected by the payor during which the payor expects an employee to drive a standard automobile in connection with the performanc e of services as an employee of the employer before the automob ile is replaced. The period may not be less than two calendar years. (11) Retention mileage . Retention mileage is the annual mileage multiplied by the number of calendar years in the retention period. (12) Residual value . The residual value of a standard automobile is the projected amount for which it could be sold at the end of the retention period after being driven the retention mileage. The Service will accept the following safe harbor residual16 values for a standard automobile computed as a percentage of the standard automobile
cost: Retention period Residual value 2-year 70 percent 3-year 60 percent 4-year 50 percent .03 FAVR allowance in lieu of fixed and variable costs

. (1) A reimbursement computed using a FAVR allowance is in lieu of the employee's deduction of all the fixed and vari able costs paid or incurred by an employee in driving the automobile in connection with the performance of services as an employee of the employer, except as provided in se ction 9.06 of this revenue procedure. Items such as depreciation (or lease payments), maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insuranc e, license and registration fees, and personal property taxes are included in fixed and variable costs for this purpose. (2) Parking fees and tolls attributable to an employee driving the standard automobile in connection with the performanc e of services as an employee of the employer are not included in fixed and variable costs and may be deducted as separate items. Similarly, interest relating to the purchase of the standard automobile may be deducted as a separate item, but only to the ex tent that the interest is an allowable deduction under § 163.
.04 Depreciation

. (1) A FAVR allowance may not be paid with respect to an automobile for which the employee has (a) claimed depreciati on using a method other than straight-line17 straight-line for its estimated useful life, (b) claimed a § 179 deduction, (c) claimed the special depreciation allowance under § 168(k), or (d) used ACRS under former § 168 or MACRS under current § 168. If an employee uses actual costs for an owned automobile that has been covered by a FAVR allowance, the employee must use straight-line depreciation for the automobile's remaining estimated useful life (subject to the applicable depreciation deduction limitations under § 280F). (2) Except as provided in section 8. 04(3) of this revenue procedure, the total amount of the depreciation component for t he retention period taken into account in computing the periodic fixed payments for t hat retention period may not exceed the excess of the standard automobile cost ov er the residual value of the standard automobile. In addition, the total amount of the depreciation component may not exceed the sum of the annual § 280F limitat ions on depreciation (in effect at the beginning of the retention period) that apply to the standard automobile during the retention period. (3) If the depreciation component of per iodic fixed payments exceeds the limitations in section 8.04(2) of this re venue procedure, that se ction will be treated as satisfied in any year during which the tota l annual amount of the periodic fixed payments and the periodic variable payments made to an employee driving 80 percent of the annual business mileage of the standard aut omobile does not exceed the amount obtained by multiplying 80 percent of the annual business mileage of the standard automobile by the business standard mileage rate for that year (under section 5.01 of the applicable revenue procedure). (4) The depreciation included in each periodic fixed payment portion of a18 FAVR allowance paid with respect to an autom obile reduces the basis of the automobile (but not below zero) in determining adj usted basis as required by § 1016. See section 8.07(2) of this revenue procedure for the r equirement that the employer report the depreciation component of a periodic fi xed payment to the employee. .05 FAVR allowance limitations

. (1) A FAVR allowance may be paid only to an employee who substantiates to the payor for a calendar year at leas t 5,000 miles driven in connection with the performance of services as an employee of the employer or, if greater, 80 percent of the annual business mileage of that FAVR allowanc e. If the employee is covered by the FAVR allowance for less than the entire cal endar year, these limits may be prorated on a monthly basis. (2) A FAVR allowance may not be paid to a control employee (as defined in § 1.61-21(f)(5) and (6), excluding the $100,000 limitation in par agraph (f)(5)(iii)). (3) An employer may not pay a FAVR allowance if at any time during a calendar year a majority of the employ ees covered by the FAVR allowance are management employees. (4) An employer may not pay a FAVR allowance to any employee unless at all times during a calendar year at least fi ve employees in total are covered by FAVR allowances provided by the employer. (5) A FAVR allowance may be paid only with respect to an automobile (a) owned or leased by the employee receiving the payment, (b) the cost of which, as a new vehicle (whether or not purchased new by the employee), was at least 90 percent of the standard automobile cost taken into account for purposes of determining the19 FAVR allowance for the first calendar year the employee receives the allowance with respect to that automobile, and (c) the model year of which does not differ from the current calendar year by more than the number of years in the retention period. (6) A FAVR allowance may not be paid with respect to an automobile leased by an employee for which the employ ee has used actual expenses to compute the deductible business expenses of the automob ile for any year during the entire lease period. For a lease commencing on or bef ore December 31, 1997, the "entire lease period" means the portion of the lease period (including renewals) remaining after that date. (7) The insurance cost component of a FAVR allowance must be based on the rates charged in the base locality fo r insurance coverage on the standard automobile during the current calendar year without taking into account rate-increasing factors such as poor driving records or young drivers. (8) A FAVR allowance may be paid only to an employee whose insurance coverage limits on the automobile with respect to which the FAVR allowance is paid are at least equal to the insurance coverage limits used to compute the periodic fixed payment under that FAVR allowance. .06 Employee reporting . Within 30 days after an employee's automobile is initially covered by a FAVR allowance, or is again covered by a FAVR allowance if coverage has lapsed, the employee by writt en declaration must provide the payor with the following information: (1) the make, m odel, and year of the employee's automobile, (2) written proof of the insurance cover age limits on the automob ile, (3) the odometer reading of the automobile, (4) if owned, the purchase price of the automobile or, if20 leased, the price at which the automobile is ordinarily sold by retailers (the gross capitalized cost of the automobile), and (5) if owned, whether the employee has claimed depreciation with respect to the automobile using any of the depreciation methods prohibited by section 8.04(1) of this re venue procedure or, if leased, whether the employee has computed deductible business expenses with respect to the automobile using actual expenses. The information descr ibed in (1), (2), and (3) of the preceding sentence also must be supplied by the empl oyee to the payor within 30 days after the beginning of each calendar year that the empl oyee's automobile is covered by a FAVR allowance. .07 Payor recordkeeping and reporting

. (1) The payor or its agent must mainta in written records setting forth (a) the statistical data and projections on whic h the FAVR allowance payments are based, and (b) the information provided by the empl oyees pursuant to section 8.06 of this revenue procedure. (2) Within 30 days of the end of each calendar year, the employer must provide each employee covered by a FAVR a llowance during that year with a statement that, for automobile owners, lists the amount of depreciation included in each periodic fixed payment portion of the FAVR allow ance paid during that calendar year and explains that by receiving a FAVR allow ance the employee has elected to exclude the automobile from the Modified Accelerat ed Cost Recovery System pursuant to § 168(f)(1). For automobile lessees, the stat ement must explain that by receiving the FAVR allowance the employee may not co mpute the deductible business expenses of the automobile using actual expenses for the entire lease period (including renewals).21 For a lease commencing on or before Decem ber 31, 1997, the "entire lease period" means the portion of the lease period (incl uding renewals) remaining after that date.
.08 Failure to meet section 8 requirements . If an employee receives a mileage allowance that fails to meet one or more of the requirements of section 8 of this revenue procedure, the employee may not be treated as covered by any FAVR allowance of the payor during the period of the failure. Neve rtheless, the expenses to which that mileage allowance relates may be deemed substantiated using the method described in sections 5, 9.01(1), and 9.02 of this revenue procedure to the extent the requirements of those sections are met. SECTION 9. APPLICATION .01 If a payor pays a mileage allowance in lieu of reimbursing actual transportation expenses incurred or to be in curred by an employee, the amount of the expenses that is deemed substantia ted to the payor is either: (1) for any mileage allowance other than a FAVR allowance, the lesser of the amount paid under the mileage allowance or the applicable standard mileage rate in section 5.01 of this revenue procedure mult iplied by the number of business miles substantiated by the employee; or (2) for a FAVR allowance, the amount paid under the FAVR allowance less the sum of (a) any periodic variable rate payment that relates to miles in excess of the business miles substantiated by the empl oyee and that the employee fails to return to the payor although required to do so, (b) any portion of a periodic fixed payment that relates to a period during which the employ ee is treated as not covered by the FAVR allowance and that the employee fails to retu rn to the payor although required to do so,22 and (c) any optional high mileage payments. .02 If the amount of transportation expens es is deemed substantiated under the rules provided in section 9.01 of this re venue procedure, 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) and (b)(6) (listed property, which in cludes passenger automobiles and any other property used as a means of transportati on) of § 1.274-5T, and paragraph (c) of § 1.274-5, the employee is deemed to sati sfy the adequate accountin g requirements of § 1.274-5(f) as well as the requirement to substantiate by adequate records or other sufficient evidence for purposes of § 1.274-5(c). See also § 1.62-2(e)(1) for the rule that, in order to satisfy the substantia tion requirement of an accountable plan, an arrangement must require business expenses to be substantiated to the payor within a reasonable period of time. .03 An arrangement providing mileage allow ances will be treated as satisfying the requirement of § 1.62-2(f)(2) with respect to returning amounts in excess of expenses as follows: (1) For a mileage allowance (other than a FAVR allowance) paid only at a cents-per-mile rate, the requirement to return excess amounts is treated as satisfied if the employee is required to return within a reasonable period of time (as defined in § 1.62-2(g)) any portion of the allowance that re lates to miles of travel not substantiated by the employee, even though t he arrangement does not require the employee to return the portion of the allowance that relates to the miles of travel substantiated and that exceeds the amount of the employee's expens es deemed substantiated. For example,23 assume a payor provides an employ ee an advance mileage allowance of $109.00 based on an anticipated 200 business miles at 54. 5 cents per mile (at a time when the business standard mileage rate is 50.5 cents per mile), and the employee substantiates 120 business miles. The requirement to return excess amounts is treated as satisfied if the employee is required to return the porti on of the allowance that relates to the 80 unsubstantiated business miles ($43.60) ev en 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 9.01 of this revenue procedure ($60.60) for the 120 substantiated business miles. However, the $4.80 excess portion of the allowance is treated as paid under a nonaccount able plan as discussed in section 9.05. (2) For a mileage allowance (other than a FAVR allowance) paid other than only at a cents-per-mile rate, the require ment to return excess amounts is treated as satisfied if the employee is required to return within a reasonable period of time (as defined in § 1.62-2(g)) any portion of the a llowance that exceeds the product of the standard mileage rate and the number of miles of travel substantiated by the employee. For example, assume a payor provides an employee an advance mileage allowance of $400 per month plus 20 cents per mile based on an anticipated 2000 miles for a total of $800 (at a time when the business standard m ileage rate is 50.5 cents per mile), and the employee substantiates 1000 business mile s. The requirement to return excess amounts is treated as satisfied if the employee is required to return $295, the portion of the allowance that exceeds the product of the standard mileage rate and the miles substantiated ($505). (3) For a FAVR allowance, the requi rement to return excess amounts is24 treated as satisfied if the employee is requi red to return within a reasonable period of time (as defined in § 1.62-2(g)), (a) the por tion (if any) of the periodic variable payment received that relates to miles in excess of the business miles substantiated by the employee, and (b) the portion (if any) of a periodi c fixed payment that relates to a period during which the employee was not co vered by the FAVR allowance. .04 An employee is not required to incl ude in gross income the portion of a mileage allowance received from a payor t hat is less than or equal to the amount deemed substantiated under sect ion 9.01 of this revenue procedure, provided the employee substantiates in a ccordance with section 9.02. See § 1.274-5T(f)(2)(i). Assuming that the remaining requirements fo r an accountable plan provided in § 1.62-2 are satisfied, that portion of the allowance is treated as paid under an accountable plan, is not reported as wages or other compens ation on the employee's Form W-2, and is exempt from withholding and payment of employment taxes. See § 1.62-2(c)(2) and (c)(4). .05 An employee is required to include in gross income the portion of a mileage allowance received from a payor that ex ceeds the amount deemed substantiated under section 9.01 of this revenue procedure, provided the employee substantiates in accordance with section 9.02 of this revenue procedure. See § 1.274-5T(f)(2)(ii). In addition, the excess portion of the allow ance is treated as paid under a nonaccountable plan, is reported as wages or other com pensation on the employee's Form W-2, and is subject to withholding and payment of employment taxes. See § 1.62-2(c)(3)(ii), (c)(5), and (h)(2)(i)(B). .06 If an employee’s substantiated expenses are less than the employee's actual25 expenses, the following rules apply: (1) Except as otherwise provided in section 9.06(2) of this revenue procedure with respect to leased automobile s, if the amount of the expenses deemed substantiated under the rules provided in se ction 9.01 of this revenue procedure is less than the amount of the employee's busi ness 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 (not just the excess over the business standard mileage rate), 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 § 1.274- 5T(f)(2)(iii). However, for purposes of claiming this itemized deduction, substantiation of the amount of the expenses is not required if the employee is claiming a deduction that is equal to or less than the applicable standard mileage rate multiplied by the number of business miles substantiated by the empl oyee minus the amount deemed substantiated under section 9.01 of this revenue procedure. The itemized deduction is subject to the 2-percent floor on miscellaneous item ized deductions provided in § 67. (2) An employee whose business transportation expenses with respect to a leased automobile are deemed substantiated under section 9.01(1) of this revenue procedure (relating to an allowance other than a FAVR allowance) may not claim a deduction based on actual expenses under sect ion 9.06(1) unless the employee does so consistently beginning with the first busi ness use of the automobile after December26 31, 1997. An employee whose business transportation expenses with respect to a leased automobile are deemed s ubstantiated under section 9. 01(2) of this revenue procedure (relating to a FAVR allowance) may not claim a deduction based on actual
expenses. .07 An employee may deduct an amount com puted pursuant to section 5.01 of this revenue procedure only as an itemized deduction. This itemized deduction is subject to the 2-percent floor on miscell aneous itemized deductions provided in § 67. .08 A self-employed individual may deduct an amount computed pursuant to section 5.01 of this revenue procedure in determining adjusted gross income under § 62(a)(1). .09 If a payor's reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules of § 62(c) and the regul ations thereunder, all payments under the arrangement will be treated as made under a nonaccountable plan. See § 1.62-2(k) and Rev. Rul. 2006-56. T hus, the payments are included in the employee's gross income, are reported as wages or other compensation on the employee's Form W-2, and are subject to withholding and payment of employment
taxes. See § 1.62-2(c)(3), (c)(5), and (h)(2), and section 10.03 of this revenue procedure. SECTION 10. WITHHOLDING AND PAYMENT OF EMPLOYMENT TAXES .01 The portion of a mileage allowance (o ther than a FAVR allowance), if any, that relates to the miles of business trav el substantiated and t hat exceeds the amount deemed substantiated for those miles under sect ion 9.01(1) of this revenue procedure is treated as paid under a nonaccountable plan and is subject to withholding and payment27 of employment taxes. See § 1.62-2(h)(2)(i)(B). (1) In the case of a mileage allowance paid as a reimbursement, the excess described in section 10.01 of this revenue procedure is subject to withholding and payment of employment taxes in the pay roll period in which the payor reimburses the expenses for the business miles substantiated. See § 1.62-2(h)(2)(i)(B)(2). (2) In the case of a mileage allowance paid as an advance, the excess described in section 10.01 of this rev enue procedure is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the business miles with respect to which the advance was paid are substantiated. See § 1.62-2(h)(2)(i)(B)(3). If some or all of the business miles with respect to which the advance was paid are not substantiated within a reasonable period of time and the employee does not return the portion of the allowance that relates to those miles within a reasonable period of time, the portion of the allowance that relates to those miles is subject to withholding and pay ment of employment taxes no later than the first payroll period following t he end of the reasonable period. See § 1.62- 2(h)(2)(i)(A). (3) In the case of a mileage allowance that is not computed on the basis of a fixed amount per mile of travel (for ex ample, a mileage allowance that combines periodic fixed and variable rate payments, but that does not satisfy the requirements of section 8 of this revenue procedure), the payor must compute periodically (no less frequently than quarterly) the amount, if any, that exceeds the amount deemed substantiated under section 9. 01(1) of this revenue procedure by comparing the total mileage allowance paid for the period to the st andard mileage rate in section 5.01 of this28 revenue procedure multiplied by the number of business miles substantiated by the employee for the period. Any excess is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the excess is computed. See § 1.62-2(h)(2)(i)(B)(4). (4) For example, assume an employer pays its employees a mileage allowance under an arrangement that ot herwise meets the requirements of an accountable plan at a rate of 54.5 cents per mile (when the business standard mileage rate is 50.5 cents per mile). The employer does not require the return of the portion of the allowance that exceeds the business standard mileage rate for the business miles substantiated (4.0 cents). In June, the employer advances an employee $272.50 for 500 miles to be traveled during the month. In July, the employee substantiates to the employer 400 business miles traveled in J une and returns $54.50 to the employer for the 100 business miles not traveled. T he amount deemed substantiated for the 400 miles traveled is $202.00 and the employee is not required to return $16.00. No later than the first payroll period following the payro ll period in which the 400 business miles traveled are substantiated, the employer must withhold and pay employment taxes on $16.00. .02 The portion of a FAVR allowance, if any, that exceeds the amount deemed substantiated for those miles under section 9. 01(2) of this revenue procedure is subject to withholding and payment of employment taxes. See § 1.62-2(h)(2)(i)(B). (1) Any periodic variable rate payment that relates to miles in excess of the business miles substantiated by the empl oyee and that the employee fails to return within a reasonable period, or any portion of a periodic fixed payment that relates to a29 period during which the employee is treated as not covered by the FAVR allowance and that the employee fails to return within a r easonable period, is subject to withholding and payment of employment taxes no later than the first payroll period following the end of the reasonable period. See § 1.62-2(h)(2)(i)(A). (2) Any optional high mileage payment is subject to withholding and payment of employment taxes when paid. .03 If a mileage allowance arrangement has no mechanism or process to determine when an allowance exceeds the am ount that may be deemed substantiated and the arrangement routinely pays allowances in excess of the amount that may be deemed substantiated without requi ring actual substantiation of all the expenses or repayment of the excess amount, the failure of the arrangement to treat the excess allowances as wages for employment ta x purposes causes all payments made under the arrangement to be treated as made under a nonaccountable plan. See Rev. Rul. 2006-56. SECTION 11. EFFECTIVE DATE This revenue procedure is effective for (1) deductible transportation expenses paid or incurred on or after January 1, 2008, and (2) mileage allowances or reimbursements paid to an employee or to a c haritable volunteer (a) on or after January 1, 2008, and (b) with respect to transportation expenses paid or incurred by the employee or charitable volunteer on or after January 1, 2008. SECTION 12. EFFECT ON OTHER DOCUMENTS Rev. Proc. 2006-49 is superseded.30 DRAFTING INFORMATION The principal author of this revenue procedur e is Bernard P. Harvey of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Harvey at (202) 622-4930 (not a toll-free call).