Business Mileage Rate for 2023: Understanding the Changes and Implications

Toward the end of every year, the IRS releases a new standard mileage rate to help businesses determine reimbursement rates. Business owners use this rate to calculate deductions or reimburse employees for driving company cars.

The standard mileage rate is based on data compiled by Motus, a software company that gathers data from across the country. It includes gas/oil prices, repair and maintenance costs, insurance premiums, travel expenses, depreciation, and other costs associated with owning and operating a vehicle.

Increased By 4 Cents Per Mile

The IRS has announced that the standard mileage rate for business travel will increase by 4 cents per mile starting July 1. This will come as a relief to many employees and self-employed individuals who are suffering from the ongoing rise in gas prices.

The standard mileage rate is used to calculate the “deductible costs of operating an automobile for business and certain other purposes.” It is based on an annual study of the fixed and variable costs associated with driving a car, including gas and oil prices, service costs, vehicle insurance premiums, depreciation, travel expenses, and more.

This rate is set by the IRS and used as a benchmark by the federal government and many businesses to reimburse their employees for miles driven on business trips. However, the mileage rate does not take into account the actual driving costs that may fluctuate based on geography and time of year.

For that reason, some companies have opted to use the FAVR reimbursement method, which is more accurate and allows businesses to better manage their fleet of vehicles. Motus estimates that organizations have saved more than $1.4 billion using this method compared to the IRS mileage standard over the past several years.

Increased By 2 Cents Per Mile For Medical Or Moving Expenses

The standard mileage rate established by the IRS for business, medical, and moving expenses varies depending on the type of expense. This rate is often used by companies that reimburse employees for the cost of driving their personal vehicles for business purposes.

The rate is based on a mix of vehicle cost factors averaged out from different geographic areas over the course of the year, including gas prices, insurance, and depreciation. The IRS typically updates its mileage rates once a year.

However, the agency made an interim adjustment in mid-2022 — spiking gas prices led the agency to raise the rate by 4 cents. This increases the rate to 62.5 cents per mile for business travel and 22 cents per mile for deductible medical or moving expenses, according to IRS Announcement 2022-13.

This increase is the second time in six years that the standard mileage rate has gone up. In the first half of 2022, it rose by 1.5 cents.

For business, the rate goes up to 62.5 cents per mile for travel on or after July 1, 2022. The rate for deducting medical expenses that involve an automobile also increased to 22 cents per mile for travel on or after that date.

Meanwhile, the moving-expense rate went up to 22 cents for travel on or after July 1. The rate for charitable driving, which is set by statute and remains at 14 cents per mile, was unchanged.

Increased By 2 Cents Per Mile For Charitable Organizations

On July 1 of 2022, the standard business mileage rate for driving for work purposes will increase by 4 cents to 62.5 cents per mile. This increase comes as gas prices have soared and insurance costs continue to rise.

The IRS says that this adjustment is necessary to better reflect the actual cost of driving. In addition to rising fuel prices, auto insurance, and maintenance costs have also risen.

As a result, the business mileage rate is no longer a safe harbor for tax deductions. It does not account for the varying costs of driving across geography or time of year.

In an effort to help organizations manage these expenses, the IRS introduced a new reimbursement program called the Flexible Automotive Vehicle Reimbursement (FAVR) in 2011. FAVR allows organizations to reimburse drivers using a blended rate that combines actual costs with IRS standards.

Since the program was launched in 2011, Motus estimates that businesses have saved more than $1.4 billion using this method of reimbursement compared to the business mileage standard rate.

This is because the standard mileage rate was originally developed as a way to calculate vehicle expenses for tax deduction purposes and does not necessarily reflect actual driving costs.

Increased By 2 Cents Per Mile For Leased Vehicles

The business mileage rate in 2022 will increase by 2 cents per mile for leased vehicles starting on July 1. This change will affect all rented, leased, or rented-to-own cars, vans, pickup trucks, or panel trucks (along with hybrid and electric vehicles) that are first placed into service during the year.

The rate is based on an annual study of fixed and variable costs, including fuel prices, automobile insurance premiums, travel expenses, depreciation, maintenance and repair costs, and other vehicle-related expenses. It is a standard that many companies use to calculate deductible car expenses in lieu of tracking actual costs.

However, the business mileage rate is not a perfect solution for reducing taxable income. It focuses on both the fixed and variable costs of using a vehicle for business purposes, which may create inequalities in reimbursements among employees.

That’s why the IRS offers taxpayers two options to reduce deductible vehicle expenses: They can either use a standard business mileage rate or they can calculate their own expenses by adding up all of their vehicle-related costs, whichever produces the greater deduction.

One option is to keep detailed records of all of your vehicle-related expenses and track your mileage carefully. This requires a lot of time and effort, but it can be worth it for a few years, particularly if you plan to use your vehicle for more than six months at a time.

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