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 can be used to substantiate the business expense of using a personal vehicle for business. Additionally, 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 calculate the use of their vehicle for business purposes. In 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 a difference from the 54.5 cents per mile established for 2018. 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.
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 has been gathered through market cost research during the annual period prior to announcement of the rate and is based on many critical variables and factors. The information that goes into the rate is based upon detailed local and state-by-state cost data that is used to create an easy-to-use national per-mile rate to calculate business vehicle expenses.
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. All of the costs are calculated based upon a prescribed life-cycle and then presented in the simple cents-per-mile rate.
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 most affected by the rate change are the ones using the IRS mileage rate as a reimbursement number for their drivers.
Many organizations that provide a mileage reimbursement today use the rate to reimburse employees for driving their own vehicles on business. They realize the benefit of tax-free reimbursements by using the IRS rate.
If your company uses the IRS safe harbor rate for reimbursement, there are a number of factors to consider before determining if this is still the best option. Remember, this represents a “national rate”, so depending on where your organization does business, annual business mileage and many other real business-need factors, it may not be an accurate depiction of the true costs in your area. This is a timely opportunity to consult with an expert to evaluate more accurate alternative policies for your business driver reimbursements that will better fit your business needs
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 just a handful of road warriors, the rate is an important starting point to understand your tax position, fairness to all drivers, and to ensure program efficiency.
About the Author
Mike has 20+ years of experience consulting, implementing and supporting professional solutions for Business vehicle reimbursement plans, Mobile Applications, and employee relocations. His long tenure at Runzheimer has made him a trusted expert both externally and internally.More Content by Mike Bassi