If you receive mileage reimbursements from your employer or your own company, it is easy to assume the tax story ends there. After all, the reimbursements are tax-free, and the vehicle still feels personal.

In reality, that assumption can create a surprise when the vehicle is sold or traded in.

Under IRS rules, a vehicle used for business and reimbursed at the standard mileage rate is treated as a business asset for tax purposes. When that vehicle is disposed of, there may be a taxable gain or a deductible loss, even if you were fully reimbursed for every business mile.

Mileage-reimbursed vehicles are treated as business assets. The IRS mileage rate includes built-in depreciation that can create a taxable gain or an ordinary loss when the vehicle is sold or traded.

Why Mileage Reimbursements Can Be Misleading

Mileage reimbursements paid under an accountable plan are excluded from income. That exclusion leads many people to believe there is nothing else to track.

The key issue is that the IRS standard mileage rate includes a deemed depreciation component. Each year you are reimbursed, part of that reimbursement is treated as depreciation for tax purposes, even though no separate depreciation deduction appears on your return.

That deemed depreciation reduces your vehicle’s tax basis over time.

Your “Personal” Car May Be a Business Asset

If you use your own vehicle for work and receive standard mileage reimbursements, the tax code treats the vehicle as business property.

This applies to:

W-2 employees
Corporate owner-employees
Anyone reimbursed under an accountable plan

Once the vehicle is classified as business property, its sale or trade-in becomes a taxable event.

How Deemed Depreciation Changes the Outcome

Each year, the IRS mileage rate includes an embedded depreciation amount per mile. Over time, that depreciation reduces your basis in the vehicle.

When you later sell or trade in the car, the IRS compares:

The amount you receive
Your adjusted tax basis after deemed depreciation

If the vehicle is worth less than its adjusted basis, the result can be an ordinary loss, even though you were reimbursed for every mile.

If the vehicle is worth more than its adjusted basis, the result can be a taxable gain.

This calculation and treatment are governed by IRS rules summarized in the Bradford Institute analysis bradfordtaxinstitute.com_Conten….

Why This Often Creates a Missed Deduction

Many reimbursed drivers assume there is nothing to report when they dispose of a vehicle. As a result, they never calculate the gain or loss and miss the opportunity to deduct a legitimate business loss.

Under current law, vehicle trade-ins are taxable dispositions, and losses on business vehicles may qualify as ordinary losses, not capital losses.

That distinction can significantly improve the tax result.

Where the Transaction Is Reported

When a mileage-reimbursed vehicle is sold or traded:

The transaction is reported on Form 4797
Deemed depreciation is included in the basis calculation
Losses may be treated as ordinary under Section 1231

This reporting applies even when reimbursements were excluded from income.

The Takeaway for Business Owners and Employees

Mileage reimbursements do not end the tax story.

If you:

Use your personal vehicle for business
Receive standard mileage reimbursements
Trade in or sell that vehicle

There may be a gain or a deductible loss that belongs on your return.

Failing to analyze the transaction can mean leaving money on the table or creating an error that surfaces later.

If you receive mileage reimbursements and have sold or traded a vehicle, or expect to do so soon, it is worth reviewing how the transaction should be reported. A short review can determine whether a deduction was missed or a future issue can be avoided. Talk to us today.

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