Every year around the middle of December, the IRS releases the standard mileage rate for the following year. This is known as the "safe harbor rate". This rate, which is developed using Runzheimer data, is meant to be a number that individuals can use to write off the business expense of a personal vehicle on their taxes. However, since its inception, it has been used in a number of ways including being used as a standard to reimburse employees for using their own vehicles for work.
So what is the IRS mileage rate? Why does it exist? How is it developed? How does it affect your business?
A little background on the IRS mileage rate
The first IRS standard mileage rate was developed to allow an easy way for individuals who drive for business to “write off” the use of their vehicle for business purposes. In the year 1981, the IRS began to use Runzheimer data to help them develop the rate on a more frequent basis. The first rate was 22 cents per mile driven—quite the difference from the 54 cents per mile that it is here in 2016. Today, the IRS Mileage Rate is typically updated once a year, although it has been changed mid-year to adjust for major cost changes in the vehicle, gas, and insurance industries.
Why does the IRS rate exist?
The answer to this question is one of the most common misconceptions of the rate. Very often, this number is seen as a tax-free way to reimburse employees who drive their personal vehicle for business. However, this is not its true purpose. As mentioned, the IRS standard mileage rate exists as a way for individuals to write off the business expense of a personally owned asset. For example, this means that if a person drives 1000 business miles in a year, they could deduct $540 on their taxes according to that year’s rate of 54 cents per mile.
How is the IRS mileage rate developed?
The IRS rate is developed annually to adjust for changing costs in the vehicle industry. The data used for the rate is pulled from October of the previous year (for example, the IRS rate effective January 1st, 2017 will be based on data from October 2016) and is based on several variables and factors. The information that goes into the rate uses national averages to create the best "blanket" tax deduction amount for all areas across the country.
The different costs associated with owning and operating a vehicle go into developing the rate. These data points include, but are not limited to, gas prices, insurance premiums, taxes, and more. Even if the cost is a fixed expense, like insurance, it is broken down into a per mile cost using mileage data.
How does the IRS mileage rate affect my business?
When the news of the new rate comes out in mid-December, every organization should do a review of their programs to ensure they’re in compliance with IRS rules. The organizations the rate will affect the most are the ones using the IRS mileage rate as a reimbursement number for their drivers.
Many organizations that are doing a mileage reimbursement today use the rate as an IRS-approved number to reimburse employees for driving their own vehicles. They see the benefits because if you are reimbursing at or below this rate, the dollars are tax free.
If your company uses the IRS safe harbor rate for reimbursement, there are a number of factors to consider before determining if this is the best option. Remember, the rate is created using national averages, so based on where your organization does business, it may not be an accurate depiction of the true costs in your area. If your organization uses the IRS rate in this way, you may want to use this as an opportunity to consult with an expert to determine the best way to handle your business driver reimbursements and what program (or programs) are the best fit for you.
The IRS standard mileage rate is a very important number to know and get familiar with. Whether you are a business owner with hundreds of people on the road, or an individual who drives for business only occasionally, the rate is important to understand so you can maximize your tax deductions and ensure program efficiency.
Did this article answer your questions about the IRS mileage rate? We would love to answer any additional questions about the IRS mileage rate that you may have. You can reach out to us here, contact us through our website or social media, or give one of our consultants a call at 800-588-1702.