It’s official: the 2021 IRS standard mileage rate is $0.56. The new year’s rate, announced on December 22, is 1.5 cents less than the previous year’s rate. While this news may not be shocking to us, it might be new to you. Here we’ll be breaking down what the IRS Standard mileage rate is, changes to driving costs, and what it means for your company.
What is the IRS Standard Mileage Rate?
The IRS standard mileage rate is a benchmark that companies can use for reimbursing their employees for business mileage. The rate has many names and a bit more nuance you can dig into, but there are a couple things to know. The first being that the IRS monitors trends in business driving based on analysis from the world’s largest retained pool of drivers. The second is how the rate affects taxation. If a company provides a reimbursement higher than the IRS standard mileage rate, that reimbursement becomes taxable.
What are the latest trends affecting business driving?
It’s been said before and we’ll say it again: 2020 has been far from normal. The price of oil started low due to a surplus early on in the year, and it remained low due to a lack of demand, an effect of the pandemic slowing and even pausing economies world-wide. Interestingly enough, costs of vehicle ownership has not changed too drastically during the year, likely due to the shift of public transportation users opting for a personal vehicle. Despite reduced travel and accident rates nationwide, insurance premiums are now 29% higher than they were a decade ago.
All of these things that occurred in 2020 will influence driving trends and costs in 2021. As business mileage begins to return to pre-pandemic levels, as demand for oil increases, we will likely see an increase in the price of gas. But current trends indicate that return will take time.
What should your company account for changing driving costs?
That depends on the type of vehicle program your company has. We’ll start with mileage reimbursement.
Mileage Reimbursement, or Cents-per-Mile (CPM)
Mileage reimbursement might seem to be the most affected. Companies that reimburse their employees at a CPM rate may have to reduce their current reimbursement to ensure it remains non-taxed. Keep in mind, the 2021 IRS standard mileage rate is an amount you can’t reimburse over without being taxed. You can still offer a fair reimbursement below the rate. Know that mileage reimbursements do favor high mileage drivers and there are options that better provide for mobile workers.
Companies with a car allowance vehicle program already face serious tax waste with their current program. An accountable allowance can lessen that with business mileage logs, ensuring an amount up to the 2021 IRS standard mileage rate remains untaxed. If the flat allowance provided to employees goes over the rate, the excess is taxable. While an accountable allowance is one solution to the issue of tax waste, there are other, more thorough vehicle programs that don’t have this issue.
A company-provided vehicle program has no need for reimbursement, right? Whether a company owns or leases its fleet, the 2021 IRS standard mileage rate won’t impact it. While it’s true that there are no immediate reimbursement needs for a company-provided vehicle program, there is a greater issue. During the pandemic, companies with company cars were paying for an asset they weren’t using. As more and more work has shifted to the safety of the virtual space, lease payments continue, vehicle maintenance continues, depreciation continues. In a time when paying for idle assets makes less and less sense, companies are looking for alternatives to their company-provided vehicle program. And when you’re looking for alternatives, it helps to know how the 2021 IRS standard mileage rate will factor into things.
What comes next?
You know the new rate. Now you need to decide what your company will do with it. If your company is looking to make a change in their current vehicle program, reach out to us. Over the past several decades we’ve helped companies find ROI in their vehicle programs, while helping their mobile workforces receive the reimbursements they deserve. What’s more, we help the IRS configure the yearly mileage standard rate. So contact us, and we’ll help you find and implement the vehicle program that best suits your company.