As 2020 comes to an end, companies will be focusing on closing Q4 and preparing for the year ahead. One way organizations can set themselves up for success? Preparing for the 2021 IRS mileage rate. How will the rate change, and more importantly, how will it impact your business?
The 2021 IRS Mileage Rate
If you’re unaware of what the IRS mileage rate is, a little education goes a long way. You may know it by one of its many names, but the rate is essentially the highest amount a company can reimburse it’s employees per mile without having to pay taxes on the reimbursement. If you want to dive deeper into the rate, read this post about the IRS mileage rate.
What determines a mileage rate?
There are several indicators that go into determining any mileage rate a company might use. Many Let’s start with the big one.
Oil has had a rocky year. That news may have been buried among all the other headlines, but it isn’t hard to point out a few contributors. The pandemic had its impact, depressing the economy both here and abroad, decreasing the amount of personal and business mileage. Even before the Pandemic, Russia and OPEC+ were in a production standoff with no clear winner. This was likely done to capture market share, but, from a simple supply and demand perspective, there was plenty of oil and not a lot of need. Heading into the fourth quarter, business mileage activity remains below pre-pandemic levels, as does demand for fuel.
While the pandemic and oil surplus were atypical aspects of 2020, they are likely to have lasting impacts on 2021. The pandemic continues in the United States, with many indicators suggesting business activity might not recover to pre-pandemic levels until summer of 2021 at the earliest. As industries like travel and tourism that greatly impact fuel consumption continue to see little activity, demand might take its time to rebalance the oil surplus of the previous year.
The perpetual rise of insurance rates was almost as dependable as the passage of time. Then, for the first time in a decade, those rates dropped. The reasons were obvious. Fewer and fewer people were traveling. That meant lower traffic, less distracted drivers and fewer accidents. The dip in insurance rates is not likely to play an enormous role in the decision of the 2021 rate, but it’s worth pointing out nevertheless.
Vehicle Costs and Vehicle Maintenance
Following the bankruptcy and downsizing of rental car businesses, used vehicle prices went down considerably. The price of used vehicles don’t have an impact on mileage rates. However, with a lack of new vehicle inventory in recent months, used cars prices are rising. Which means the price of new vehicles remains significantly less impacted. According to Kelly Blue Book valuations, new-vehicle prices increased by 2.5% year over year in September 2020. However, over the past few months, new-vehicle prices have remained flat, indicating challenges with supply among other things. While the vehicle maintenance industry saw a decline during the pandemic, it has since bounced back and could potentially raise prices to catch up to end of year growth targets.
What will the 2021 IRS Mileage Rate be?
While we’re still months from the announcement, this year has been full of indicators, all pointing toward a decrease. How much of a decrease? We couldn’t say. But when we do know, we’ll be sure to share it here.
What can your company do to prepare for the 2021 IRS Mileage Rate?
Does your company reimburse its employees at the current IRS Mileage Rate of 57.5 cents? You may want to reconsider that approach, for several reasons.
- Applying the IRS mileage rate as a reimbursement often results in under-reimbursing low mileage drivers while over-reimbursing high mileage drivers. Look into an option that is fair to every employee. It will likely also offer better cost-control.
- Fuel and maintenance costs are area specific. Reimbursing all employees at the same rate, or paying each the same lump sum allowance is unfair and wasteful.
- The right cents-per-mile reimbursement can be lower than the IRS Mileage rate. In fact, it probably should be. The IRS Mileage rate mostly exists as a guide; reimburse over the rate and the reimbursement will be taxed. Consider a mileage rate that can benefit your employees and your company.
Of all the vehicle program options, the Fixed and Variable Rate (FAVR) reimbursement might be the best fit. Accounting for both fixed and variable vehicle use costs, it’s the only IRS recommended reimbursement method. Interested in learning more about FAVR?