The IRS recently announced the standard mileage rate for 2017, advising taxpayers of the optional cents per mile reimbursement rate for the year. It’s important for businesses with mobile employees to be aware of this announcement. The 2017 standard mileage rate provides a benchmark for mobile workers to calculate their reimbursement for their business mileage. Some companies will leverage this information to reimburse their employees. However, it is not the most fair or accurate mileage reimbursement method available to businesses.
Each year the IRS calculates a cent per mile rate. With it, taxpayers can be reimbursed for the business miles driven on their personal vehicles. For 2017, the IRS has determined a rate of 53.5 cents per mile for each business mile driven. The IRS also determined 17 cents per mile rate for medical or moving purposes and 14 cents per mile rate for travel related to charitable service purposes.
How did the IRS determine this rate? The IRS accounts for the average costs of owning and operating a vehicle in the previous year. This means the IRS averaged the historical data from 2016 to determine the 2017 standard mileage rate. That is despite any changes to the current costs. These include averaged fixed and variable costs like taxes, vehicle depreciation, gas prices, oil prices, and car maintenance. Since the rate is dependent on these prices, it changes every year. In comparison to last year, the 2017 IRS mileage rate dipped slightly from the previous 54 cents per mile rate. This is due to the changes in the costs of operating a vehicle since last year. These fluctuations include the decrease in gas prices and fuel costs based nationwide.
Quite simply, the IRS calculated the standard mileage rate for 2017 based on fixed-national averages. This poses a major problem to businesses required by the IRS to accurately reimburse their employees for their business mileage. Averaging the cost of things like gas and oil results in discrepancies and inaccuracies in mileage reimbursement.
As Motus CEO Craig Powell points out in this recent Forbes article, reimbursement based solely on the 2017 standard mileage rate creates winners and losers within mobile workforces. For example, a sales representative driving in Los Angeles, California will incur much higher costs to operate their vehicle than a food merchandiser driving locally around Sioux Falls, South Dakota. To fairly-reimburse each of their employees, businesses need a more robust reimbursement option to account for variable costs.
The fixed and variable rate (FAVR) reimbursement methodology calculates the most accurate reimbursement rate. Recommended by the IRS, the FAVR methodology is customized to each individual mobile employee. This type of reimbursement program factors in the specific costs of operating a vehicle where they live, where they drive, and even to the level of what type of vehicle they drive. By factoring in these unique costs, FAVR programs are more accurate than other methodologies like monthly flat allowances or cents per mile programs.
In addition, reimbursements through FAVR programs are paid tax-free allowing businesses to avoid the tax-waste associated with other programs. For example, flat allowance programs are subject to tax for both the employee and the employer. Businesses operating FAVR programs eliminate tax waste and save on their companies’ overall expenses by only reimbursing employees exactly what they deserve.
The 2017 standard mileage rate does not provide an accurate, fair, or defensible reimbursement option for businesses operating with mobile employees. As the only IRS recommended reimbursement methodology, FAVR programs save companies money by taking into account the variable costs associated with each individual mobile employee.