As we get ready to flip the calendar to 2024, organizations are preparing themselves for what’s to come in the year ahead. At this time, the Internal Revenue Service (IRS) is also gearing up to release its annual mileage rate for the upcoming year. While employees have used this rate as a standard mileage deduction in years past, they can no longer deduct business mileage from their taxes. So, what is its business purpose and what factors may contribute to the 2024 IRS mileage rate?
For those who may not be familiar, the IRS standard mileage rate is a benchmark that companies can use to pay tax-free reimbursements to employees who use their own vehicles for business.
Prior to the 2018 Tax Cuts and Jobs Act (TCJA) enacted by the Trump administration, drivers were able to write off business mileage on their taxes. Once signed into law, this act no longer allowed employees to claim mileage as a business expense deduction. To remain compliant with state and federal labor laws, many companies responded by reimbursing their employees who drive for work at or below the IRS mileage rate to remain compliant with state and federal labor laws.
Companies still use this rate to reimburse employees who use their personal vehicles for business driving. However, that is not its intended application. The IRS mileage rate is a guideline for mobile worker reimbursement because it is the threshold for taxable reimbursement. Employee reimbursements are tax-free as long as a company’s allowance or cents-per-mile reimbursements are not above the annual rate.
The IRS monitors trends in business driving based on analysis from the world’s largest retained pool of drivers to calculate this rate, which is then used to determine taxation. If a company provides a reimbursement higher than the IRS standard mileage rate, that reimbursement becomes taxable. Below are some of the major factors that impact business driving and how the rate is calculated.
While there are more expenses to driving than just fuel costs, they still play a significant role in calculating the 2024 IRS mileage rate. Fuel can make up as much as 23% of driving costs. While most of the components of gas prices are typically stable, crude oil prices change daily and are the main influencer of prices at the pump. Market volatility ebbed and flowed since the pandemic with production disruptions such as the war in Ukraine and events in the Middle East.
These extenuating circumstances continue to disrupt conventional price cycles and make it challenging to accelerate production back to normal levels. In the last five years, gas prices hit the lowest average in 2020 at a price of $2.19 per gallon (when demand was low and the market was oversupplied). That price point seems very distant at the 2023 average of $3.60. It should be noted that the average price in 2022 was $3.98, but with the number of conflicts currently impacting oil producing nations, the future of oil prices remains unclear.
Vehicle prices have been high all year, even before the autoworkers strike. With the continued UAW strike, vehicle prices are expected to climb even higher. Not only have vehicle prices climbed, but inflation has pushed the FED to raise interest rates multiple times this year. Still, demand remains high. The average used vehicle price was at $27,028 in July (before the UAW strike) while the new vehicle retail transaction price has eclipsed $48,334, up nearly $200 since last year. How the strike impacts these prices and sales of vehicles remains to be seen.
Depreciation typically goes up year over year, and may have had a similar influence on the 2024 IRS mileage rate. The past few years, however, have been different. The disparity between supply and demand created a pricing bubble that is amplifying costs and residual values. This caused depreciation rates to fall. During the pandemic, depreciation rates also fell more rapidly than anticipated due to disruptions in the supply chain and uneven recovery in many sectors. Vehicle depreciation had been holding steady in the 12-17% range year-over-year prior to the pandemic. However, in 2020 alone there was an 88% year-over-year decrease. Vehicle depreciation remains lower than pre-pandemic levels in 2021, and with the UAW strike may decrease again in 2023.
In the automotive world, 2023 has been a year of disruptions and rising prices. Like new vehicle prices, insurance premiums have increased in 2023. That might not necessarily be news, insurance does tend to see year-over-year increases. What is news is that premiums rose 17% in the first half of the year. That’s over twice the predicted rate of 7% and could impact the 2024 IRS mileage rate.
If your company reimburses at the 2023 IRS mileage rate of 65.5 cents per mile, we encourage you to seek an alternative program. Why?
For most companies, the 2024 IRS mileage rate will mean an adjustment of reimbursement payments and budgets. For companies looking for opportunities to control costs, now may be the time to find a vehicle program alternative, one that’s a better fit for your businesses. The next step for those looking at other program options is education. Learn more about the alternatives in our post, Vehicle Programs: The Guide to Vehicle Reimbursement Programs.