Every year while Americans are out and about braving the hustle and bustle of the holiday shopping season, checking every item off their gift list, the IRS is delivering a gift of its own: the IRS standard mileage rate. Today, the IRS announced the yearly adjustment to the IRS standard mileage rate also known as the safe harbor rate (In this post, we will refer to it as the IRS mileage rate). For only the 7th time in the last 16 years, the rate decreased; it was reduced from 54 cents per mile in 2016 to 53.5 cents per mile for 2017. Though this decrease is slight, it could have a big impact on companies and individuals who use the rate for both tax deduction and business driver reimbursement purposes.
Our history with the IRS
Runzheimer has worked with the IRS since the 1980s, helping them develop the IRS mileage rate. With an ever changing vehicle and fuel market, it is important to update the data every year to assure an accurate tax deduction number. They rely our research, data, and recommendation to develop the annual safe harbor rate.
What contributes to the IRS mileage rate?
There are a number of factors that play a role in the data we provide to the IRS, and the process is similar to the way we develop reimbursement amounts for our vehicle clients. Runzheimer provides data and information on both the fixed and variable costs of owning and operating a vehicle across the US . Fixed costs include license and registration, taxes, depreciation and insurance. Variable costs include fuel, maintenance costs, and tires. The same fixed and variable costs that go into building our client’s FAVR vehicle program go in to the data that helps develop the IRS mileage rate. It’s important to note that the data used is a national average across the United States to account for regional differences in cost of living and pricing.
Why the decrease?
The 2017 rate has decreased from 2016 primarily due to the change in fuel costs. On average, fuel costs are significantly lower for the year, despite increasing in recent months. Plus, more than just the price of fuel goes into setting this rate. The increasing costs of both vehicle insurance and maintenance costs counteracted the large fuel price decrease—only allowing the rate to reduce by .5 cents. The beauty of the IRS mileage rate is that the combination of several factors goes in to the calculation in order to produce the most accurate and representative rate possible.
What does the new IRS mileage rate mean for employers?
A decrease in the rate has an immediate effect on employers who use the IRS mileage rate as a mileage reimbursement amount for business drivers. Organizations currently using this method should make sure to adjust their rates appropriately for 2017. Leaving your program at the 2016 rate of 54 cents per mile could result in owing taxes on the difference between the two rates. Companies not using the IRS mileage rate as a mileage reimbursement program should also take notice and look at whether they need to adjust their own programs.
A decrease in the rate also means a decrease in the amount drivers will likely be seeing in a reimbursement if you are using the IRS mileage rate as a mileage reimbursement amount. Automated mileage capture solutions or custom mileage reimbursement rates may be a more effective way to ensure business drivers are receiving a fair and accurate amount for business driving.
For tips on how to make the most of your business vehicle investments in 2017 and read about the top four things to consider, check out our tip sheet.
What does the new IRS mileage rate mean for individuals?
For individuals who drive for work and want to claim their business mileage on their tax returns, it is important to note the decrease and adjust accordingly on your 2017 taxes. A reduction in the rate means a reduction in the amount that you will be able to deduct on your 2017 taxes. It will be more important than ever to keep track of every mile that is driven in order to maximize your deduction.
In our tip sheet that outlines facts and myth about the IRS mileage rate, we discuss some key items to consider. It is important to make sure that mileage is being appropriately recorded and that trips that are personal in nature are not logged as business mileage expenses.
A change in the IRS mileage rate is an important announcement for companies and individuals alike because it affects them all in some shape or form—especially if those companies have a mobile workforce or those individuals do a lot of driving for business. This year’s rate decrease is an indication of higher level economic trends affecting driving expenses, primarily falling gas prices and increasing ownership costs.
For more information about the IRS mileage rate, check out our recent post on What it Is and How It Works, or contact one of our consultants.