CRS Analyzes Mileage Reimbursement Feature of Tax Bill

                          Louis Alan Talley

Current Law

[2] Charitable contributions made by individuals to charitable organizations ¹ are deductible from income for those taxpayers who itemized deductions. However, no charitable deduction is available for the value of any services rendered by volunteers. ² However, volunteers are permitted to deduct their "out of pocket" expenses incurred in providing donated services-when those expenses are not reimbursed.

[3] As one example, when a volunteer uses their passenger automobile (including vans, pickups, and panel trucks) for charitable purposes, a standard charitable mileage rate deduction of 14 cents per mile is provided under law. ³ In addition to this 14 cent per mile rate, the volunteer is allowed to deduct other directly related expenditures such as parking fees and tolls. However, if the taxpayer uses the standard deduction, no income tax deduction for charitable contributions is available. There are no income tax consequences when the volunteer is reimbursed by a charitable organization so long as the reimbursement does not exceed 14 cents per mile. Reimbursements above the 14 cent standard mileage expense rate are included in the taxable income of the volunteer.

Proposal for Change

[4] Included in the Taxpayer Refund and Relief Act of 1999 (H.R. 2488) is a provision that allows charitable or governmental entities to reimburse volunteers for automotive expenses up to the optional standard mileage allowance permitted for businesses. ⁴ The proposal requires the taxpayer to maintain adequate records. Further, to the extent of reimbursements, no other deduction or credit is allowable with regard to those same expenses. If passed into law, the effective date is for tax years after 1999.

Assessment

[5] The rationale of current law for the lower mileage allowance applicable for charitable purposes is that only directly attributable automotive expenses are deductible. As such, no portion of the costs for general maintenance or repair of the automobile, depreciation, or other costs such as insurance, state or local tags, or registration fees are includable in the charitable standard mileage allowance. Such costs are included -- and account for the higher mileage rate -- for business purposes. The reasoning underlying the provision is that these indirect costs are not incurred primarily to provide charitable services and, therefore, should not be reflected in the standard rate for charitable purposes.

[6] In support of the new provision, proponents argue that when charitable organizations make reimbursements greater than 14 cents per mile (and up to the business mileage rate) allowing full exclusion simplifies return filing for both the charitable organization (information returns) and the volunteers (income tax returns) who receive reimbursements. Adoption of the provision could allow tax exempt organizations to provide nontaxable reimbursements above 14 cents per mile to volunteers who use the standard deduction (and for whom current law provides no tax benefits for charitable gifts). It can be argued that the provision would help finance socially desirable activity. It is generally argued that without charitable incentives the federal government would be forced to assume some activities now provided by charities. Further, the provision could reduce the problems faced by the Internal Revenue Service for whom it is not cost effective to audit taxpayers when only small dollar amounts are involved.

[7] The primary arguments against the provision are that it may overcompensate volunteers for their automobile related expenditures and that the provision will reduce federal revenues. ⁵ The Joint Committee on Taxation has estimated that adoption of the provision would result in the loss of $1 million over the five year fiscal period from 1999-2004. The revenue loss is so small that it is not estimated on a year by year basis. Perhaps an unintended result of the legislation is that volunteers may request reimbursement rather than seeking an income tax deduction. In all cases, the taxpayer receives a greater monetary benefit from reimbursement. ⁶

² Internal Revenue Code section 170 does not specifically state that charitable contributions are limited to money or property. Thus, while the Congress has not clearly stated that contributions of time or services are not to be allowable as deductions, neither has it affirmed that they are. However, since 1920, the Treasury Department has ruled consistently that there was no deduction available for the value of services rendered. The courts have upheld the Treasury Department's position.

³ The Congress first set a deductible 12 cents per mile rate as part of the Deficit Reduction Act of 1984 (P.L. 98-369). The rate was raised to 14 cents per mile under a provision contained in the Taxpayer Relief Act of 1997 (P.L. 105-34).

⁴ The business mileage rate was 32.5 cents earlier this year but has recently been adjusted to a 31 cents per mile rate for the remainder of 1999.

⁵ If the provision is enacted into law, it is likely that it will be argued that the charitable standard deduction rate should be raised to the business mileage rate to provide (if not equality) ml balance.

⁶ First, the deduction's value is the taxpayer's marginal tax rate multiplied by 14 cents per mile. For example, in 1999 a married taxpayer filing a Joint return with income between $43,050 and $104,050 has a marginal tax bracket of 28%. The value of the deduction for 100 miles of charitable travel would be $3.92 (14c X 100 = $14.00 X 28%). If the taxpayer were reimbursed for such travel at a 14 cents per mile rate the value would be $14. The maximum reimbursement under the proposed change for a 100 mile trip would be $31.