As businesses increasingly incorporate electric vehicles (EVs) into their operations, many owners are reconsidering how they reimburse employees for vehicle use. A common assumption is that EVs require a special approach or a different IRS mileage rate, but the rules are simpler than they appear. The IRS makes no distinction between electric and gasoline‑powered vehicles for reimbursement purposes. The 2026 IRS standard mileage rate, 72.5¢ per mile for business use, covers the full cost of operating a vehicle, including depreciation, maintenance, repairs, tires, insurance, registration fees, and fuel. In the case of EVs, “fuel” is merely replaced by electricity, which the IRS treats as the direct equivalent of gasoline within its all‑inclusive mileage rate. Because the mileage rate is designed to cover average operating costs across all vehicle types, employers and employees cannot carve out or adjust the fuel portion for EVs, nor can they use a separate rate. This simplicity eliminates guesswork and ensures consistent treatment of all vehicles, which is especially helpful as more businesses adopt EVs for sustainability and cost efficiency.
Understanding the difference between mileage reimbursements and car allowances is critical for business owners who want to reduce payroll taxes and avoid IRS scrutiny. Mileage reimbursements are the cleanest and most compliant method when they operate under an accountable plan, which allows reimbursements to remain non‑taxable to employees and fully deductible to the business. To qualify, three requirements must be met: the expense must have a clear business purpose, employees must properly substantiate mileage with logs showing dates, destinations, miles driven, and business purposes, and any excess payments, such as advances or allowances beyond documented mileage, must be returned. When reimbursements are made at or below the IRS standard mileage rate and the employee provides proper documentation, the reimbursement is automatically considered substantiated. In contrast, a flat car allowance without required documentation becomes fully taxable to the employee and deductible only as compensation, not as a business expense. This often surprises employers who assume an allowance is simpler, but simplicity can come at a tax cost. Many businesses end up “grossing up” allowances so employees receive the intended amount after taxes, increasing the employer’s financial burden.
To maximize deductibility and minimize IRS exposure, business owners should adopt a written accountable plan, ensure mileage logs are submitted promptly, keep car allowance payments separate from regular wages, and perform periodic audits of employee documentation. These best practices protect taxpayers, strengthen compliance, and provide transparency across the organization. Most importantly, they apply equally to electric and gasoline vehicles. There is no separate EV mileage rate, no additional substantiation requirement, and no difference in how allowances are treated. By following accountable plan rules and maintaining clear documentation, businesses can confidently support employees who use their personal vehicles, regardless of the fuel source, while maximizing tax efficiency. At Meadows Urquhart, we help business owners build reimbursement policies that align with IRS standards, reduce risk, and support today’s evolving workforce.