2018 IRS Safe Harbor Rate: 3 Key Takeaways for Businesses

If you’re wondering what the recently announced IRS Safe Harbor Rate means for your business – we’re here to break it down for you. It’s important to understand the current rate, how it’s calculated and how it’s used by companies like yours.

In the simplest terms, the rate is meant to help calculate tax deductions for qualified mobile employees. This type of mobile employee:

    • Drives their personally-owned vehicle for work
  • Drives fewer than 5,000 business miles per year

The IRS Safe Harbor Rate can be used to calculate the tax-deductible costs incurred by these mobile workers. The rate serves as a benchmark of these costs for workers who don’t keep track of their precise mileage and how much they spend on fuel, maintenance and depreciation.

Now that we’ve covered why the rate exists, here are the three takeaways for what you need to know about the 2018 IRS Safe Harbor Rate:

1. It’s 54.5 cents per mile this year.

For 2018, the IRS announced the rate is 54.5 cents per mile as compared to 53.5 cents per mile last year. It’s interesting that the rate has increased by one cent per mile as compared to it declining from 2016 to 2017. The rate is calculated based on the average costs of owning and operating a vehicle – for last year. So, the 2018 rate is based on the nationwide average costs from 2017. It’s important to understand that it’s not based on the real-time costs of driving a personal vehicle for business. Instead, the rate relies on historical data.

Take your mortgage as a comparison point. You wouldn’t finance your house with mortgage payments based on last year’s mortgage rates, especially if there’s been economic growth in the past year. Instead, your mortgage payments would be based on the current rate for that year. Similarly, without factoring in real-time data to your mileage rate, you can end up paying more than you should.

“Reliance on stale data that is provided to calculate a reimbursement rate for an entire year is inaccurate on it’s very best day.” – Craig Powell, President and CEO, Motus

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2. It’s not a required (or even recommended) mileage reimbursement rate.

Some companies with mobile employees use the IRS Safe Harbor Rate as a reimbursement method – reimbursing 54.5 cents per mile that’s driven for work. While this seems like a simple way of reimbursing mileage, it can be costly and inaccurate for the business and employee.

Many business leaders assume that because the IRS determines the rate, it must be the right way to reimburse their employees. This is a common misconception. While the IRS determines the rate, it’s meant to be used as a benchmark and not a reimbursement method. And while it can be reimbursed tax-free, it’s not an IRS-mandated reimbursement rate.

3. The IRS recommends a different way of reimbursing mileage.

The IRS “Safe Harbor” Rate doesn’t satisfy the needs of many businesses and drivers because it doesn’t account for fluctuations in things like gas prices and insurance premiums. For example, the average insurance premium in Detroit, Michigan is $4,392 whereas the average in Charlotte, North Carolina is $1,421. Given these variable costs, it wouldn’t make sense to reimburse employees driving in these cities the same amount.

“When used for frequent travelers, the IRS Safe Harbor Rate also tends to under-reimburse low mileage drivers and over-reimburse high mileage drivers.” – Danielle Lackey, General Counsel, Motus

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So, what is the IRS-recommended reimbursement methodology? Personalized mileage reimbursement rates that account for the true costs of driving for business. With this method, each employee is reimbursed for their specific costs based on where and how far they drive for business.

Reimbursing Your Employees

Mileage reimbursement rates based on actual incurred costs are the only fair, accurate and equal way to reimburse mileage. And for mobile employees driving more than 5,000 business miles per year, they also get reimbursed tax-free with this approach. So, personalized rates are cost-effective for both the employee and business – saving on tax waste and reimbursing for an exact cost, not an estimate.

Learn more about how Motus can help businesses like yours reimburse the right amount, every time.

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The Author

Danielle Lackey

As Chief Legal Officer, Danielle is responsible for all Motus legal affairs and works with strategic business units to drive initiatives that bolster IRS and legal compliance for Motus clients. Prior to joining Motus, Danielle co-founded and served as CEO of Cadence Counsel, a company that helps law firms and companies thrive in an environment where work, as we know it, is rapidly changing. Before founding Cadence Counsel, Danielle practiced as a litigator at Latham & Watkins, representing major corporations and senior executives in complex civil and criminal matters. She earned her J.D. with Distinction from Stanford Law School and is a graduate of Brown University (Phi Beta Kappa, Magna Cum Laude).

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