Mileage Allowance: IRS mileage allowance vs. other options

Introduction

As businesses often require their employees to travel for work, it is essential to know the implications and benefits of IRS mileage allowances, especially in terms of tax deductions. The IRS standard mileage rate serves as a benchmark, offering a clear guideline for reimbursing employees’ motor vehicle work-related expenses. With recent changes and alternative programs available, the nuances of this system hold significant importance for modern-day businesses with employees on the road.

What is the IRS standard mileage rate? 

The IRS standard mileage rate is an optional cents per mile, tax deductible rate where employees are reimbursed for business-related travel. Any motor vehicle work-related expenses are meant to be covered by the IRS standard mileage rate, including wear and tear, gas, maintenance, insurance and other such expenses. It is a tax-free average rate that employers and freelancers can use to make business driving deductible. 

The IRS rate is an optional maximum

You do not have to pay the IRS standard mileage rate to yourself or to your drivers. It is “optional” because employees can also receive less tax-free. For example, you can pay 50¢ per mile, 30¢ per mile, etc.—these rates, lower than 65.5¢, are also tax-free. However, if you exceed the IRS standard rate as a reimbursement figure—say, for example, you pay 70¢ per mile—the difference between the IRS standard rate and the actual cents per mile reimbursement figure is taxed.

So in this case where you paid 70¢ per mile, payroll and income tax would need to be deducted on 4.5¢ cents per mile. 

The IRS rate is a benchmark for accountable allowances

The IRS standard rate can also be used for calculating tax-free and taxable amounts of your car allowances, which help cover expenses related to using a personal vehicle for work travel. When you offer a car allowance—for example, of $600 per month, to your employees who drive their personal vehicle for work—you can use the IRS rate to figure out how much tax you need to deduct from this figure.

Let’s say you pay an allowance of $600 per month, you just need to determine how much tax to deduct by dividing the allowance by the number of miles driven in a month, then compare that figure to the cents per mile IRS rate. So, for example, if an employee drove 1000 miles in a month, then they would have received 60¢ per mile.

This is under the current IRS mileage rate of 65.5¢, so no tax need be deducted from the allowance. But if the employee only drove 500 miles one month and you still paid them their $600 allowance, they would have received $1.20 per mile. Then, you would need to deduct tax from the delta. So 54.5¢ cents need to be taxed at the relevant payroll and income tax rates.

Note that there are other rules for accountable allowance that businesses must follow in order for these tax free expenses to be justified, namely keeping records of the expenses.

What is the IRS mileage allowance?

The IRS has announced that the standard optional mileage rate for 2023 is 65.5¢ cents per mile—the highest rate in 11 years and an increase of 3 cents over last year’s rate. 

Additionally, active-duty Armed Service members can claim moving and medical driving expenses at 22 cents per mile. This is the same as it has been since midyear 2022.

Thirdly, charitable driving expenses can be deducted at 14 cents per mile. This rate is also unchanged.

Read more about standard mileage rates and see the trend over the last 11 years.

The maximum standard vehicle price has also increased with this announcement. The new figure is $60,800, an increase of $4,700 over last year.

What was the 2022 mileage allowance?

2022 started at 58.5¢ but was raised midyear to 62.5¢ to accommodate rapidly rising gas prices.

It is extremely unusual for the IRS to raise the rate mid-year; the last time this happened was in July of 2011 for the same reason. 

Alternative programs for mileage allowances

The IRS rate, or any other simple Cents per Mile rate, can be the basis of Cents per Mile programs. But this only benefits your organization when have employees who drive for work infrequently, otherwise they are over or underpaid. Think about the receptionist who needs to drive to the bank to drop off a cheque, or the employee that goes on the occasional sales meeting. 

In other words, if a driver buys a car with insurance and drives 100 miles one month for work, they’ll only be reimbursed $62.5, which is not enough to cover the cost of insurance at the current rate. On the other hand, if an employee drives 50,000 miles a year, and their organization reimburses them at the IRS rate, they’d be compensated $32,750. That’s enough to buy a new car every year, which is not what you designed your program to do.

Here are alternative options to consider: 

Fixed and Variable Rate (FAVR): A FAVR program considers fixed and variable costs, providing a comprehensive framework for employees to navigate transportation expenses. By factoring in fixed elements (costs to “put a car in the driveway”) such as insurance and depreciation, while also enshrining reimbursement for variable operating expenses like fuel and maintenance, the FAVR program ensures an accurate reimbursement structure tailored to the unique needs of each individual. In short, FAVR mitigates the burden placed on employees and fosters a sense of financial stability within the organization using the program.

Accountable Allowance: Also known as a Tax-Free Car Allowance, under this system, employees receive a sum for transportation expenses, which they must compare to the IRS rate to determine taxability. Accountable Allowances safeguard against misuse and allow employees to tailor their reimbursements to travel patterns, all within the parameters established by the Internal Revenue Service (IRS) within document 463.

Both programs offer a cents per mile rate but also have a fixed portion so that if your employees don’t drive, your fixed costs are still covered.

Conclusion

The IRS mileage allowance rate, while providing a foundational understanding of mileage reimbursements, is only a part of a larger financial landscape that businesses should be aware of. By grasping the intricacies of this rate, companies can more effectively structure their reimbursement programs, ensuring fairness and fiscal responsibility. Moreover, while the IRS rate serves as a guideline, there are other programs, such as FAVR and Accountable Allowance, that might better suit specific organizational needs. As the cost of travel and vehicle expenses continue to fluctuate, staying informed about the available options and utilizing them appropriately remains crucial for financial optimization and employee satisfaction.

^{Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants or agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.}