In recent Republican and Democratic Presidential debates, candidates have sounded off on the US government’s failure to keep pace with advancements in technology. The issues with Healthcare.gov caused a lot of swirl and finger pointing and brought outdated federal government information technology to the forefront. The government is decades behind current technology on cyber security, data mining and defense, to name a few, and their annual IRS mileage rate calculation is no different. The IRS rate dropped to 54 cents per mile this year after increasing to 57.5 cents per mile in 2015, highlighting how a dated (non-technology led) approach to calculating the rate results in an inaccurate, seesawing mileage rate for employers and employees.
If you had asked me five years ago whether I’d be focused on IRS guidelines for mileage deductions/reimbursements, I’d have confidently told you “no”. But if you had asked whether I’d be focused on the impact software and big data have on driving efficiencies in both the public and private sectors, I’d have quickly responded “yes”. Having founded and been CEO of multiple companies, I have strong opinions on the roles government should play in driving private sector policy. No business looks to the government to inform pricing, set compensation guidance or provide T&E policy. And yet, businesses continue to follow the IRS business mileage rate, set once per year and based on data from the previous year, as a standard for mileage reimbursement. Looking to the government to determine your employees’ actual costs for operating their vehicles doesn’t make sense, and at best, is inaccurate.
In today’s day and age, where data storage, security, and accessibility have never been greater (and cheaper), there’s no excuse to continue using a consulting approach that relies on past prices to determine the business mileage rate for an entire upcoming year. It’s time we utilize technology to leverage real-time costs to drive a more dynamic and accurate mileage reimbursement rate.
Calculating the IRS Mileage Rate
The IRS mileage rate is intended to provide taxpayers with a way to easily write-off their tax-deductible costs for unreimbursed driving expenses. To determine the annual rate, the IRS relies on third-party historical data to estimate per-mile driving costs. Though created for taxpayers, many companies use the IRS rate to calculate mileage reimbursements for their mobile employees. In fact, so many companies use this rate as a default for reimbursement, that it’s often (mistakenly) referred to as the “federal mileage reimbursement rate.”
While commonly used, the IRS rate is inherently flawed (as are many well-intentioned government policies). Because it’s based on historical data, the rate always lags a year behind actual driving costs. AAA publishes their own “Your Driving Cost” Report each year which examines the all-in estimated costs to own and operate a vehicle, but they use late-year fuel prices in their analysis, which typically results in a significantly different estimated cost compared to the IRS mileage rate. Not only are the rates different, but the trends for the two are often completely conflicting. The graph below showcases this disparity, with the IRS mileage rate and AAA’s cost per mile constantly at odds. Why the discrepancy? Because the IRS mileage rate is based on year-old data, whereas AAA looks at more recent end-of-year data for fuel costs which can (and do) fluctuate drastically throughout the year.
AAA Rate vs. IRS Rate
Recent Changes to the IRS Rate
The inaccuracy of the IRS mileage rate has never been as conspicuous as it was in 2015, when the IRS raised the mileage rate to 57.5 cents per mile as gas prices fell to 5-year lows. The 2015 rate was the second highest in history behind a peak of 58.5 cents per mile in 2008. The IRS and the third-party providing the data justified the increase, saying that the rate covers fixed vehicle costs as well, which had increased. Yet, AAA’s 2015 Your Driving Cost Report paints a different picture. Their report found that the drastic drop in fuel prices offset increases in fixed costs, resulting in an overall 2% decrease in vehicle ownership and operating costs for 2015. And, had the fixed costs of ownership increased so much as to outweigh the 13.77% decrease in fuel costs, why is the 2016 rate now decreasing by 3.5 cents per mile (the biggest decrease since 2010)? Fixed costs like depreciation and insurance surely haven’t changed that much in a year, and fuel prices have only marginally decreased since last year.
The reality is that the 2015 rate of 57.5 cents per mile was based on outdated 2014 data, and the lower 2016 mileage rate is what the IRS should actually have rolled out in 2015 had the analysis been driven by current data and a software-led approach. Instead, the rates continue to be derived from the previous year’s data, and the current rate of 54 cents per mile is more likely to be representative of last year’s costs than it will be of 2016 driving costs.
What This Means for Your Company
Employers who used the 2015 IRS business mileage rate to reimburse employees overpaid. Reimbursing the slightly higher rate for one employee may have seemed insignificant, but when that amount is multiplied by tens of thousands of miles across hundreds of mobile employees, the corporate cost of the overpriced 2015 mileage rate quickly adds up. With the rate dropping in 2016, your employees will surely gripe, but in truth, most were over-reimbursed the majority of last year.
For 2016, you’ll be paying less for mileage expenses. However, if something happens that causes gas prices to climb later this year (remember the surge in prices after Hurricane Katrina?), the stagnant IRS rate could quickly fall behind actual costs, resulting in under-reimbursement for your mobile employees. You may feel like you’re getting a bargain after overpaying last year, but is it at your employees’ expense? Regardless of whether or not such a scenario occurs, one fact is clear: with an IRS rate that constantly jumps year-to-year based on old data, there will always be winners and losers. At any point in time, the rate is inaccurate, at best.
Relying on the IRS rate for mileage reimbursement may seem “reasonable” at first glance, but when you look at the discrepancies that have occurred over the past few years, it’s clear that trusting the government rate to inform business policy is anything but reasonable. Despite the vast amount of real-time data and technological solutions available today, the IRS continues to rely on historical, point-in-time data to determine their mileage rate. Consequentially, from the moment the IRS publishes their yearly rate, it’s already outdated.
As with many business processes, a software and data-driven approach provides a much better (and more modern) solution for reimbursement. Advanced platforms like Motus record employees’ mileage, account for geographically-sensitive fixed costs, and capture constantly-fluctuating fuel prices to administer more accurate and cost-effective mileage reimbursements. Rather than locking into a 12-month rate, today’s technology enables you to provide customized reimbursements that update each month based on real-time driving costs (see graph below). With a technology-led solution, treat mileage reimbursement just as you would all other business expenses – as reimbursement for actual, not estimated, costs.
Average US Fuel Price vs. Motus Variable Rate
The above graph shows how Motus’ variable rate reimbursement updated in tandem with changes in fuel prices from 2014-2015 (Note: our reimbursement also included a fixed rate component that is not depicted here).