The Costly IRS Business Mileage Rate

For as long as employees have been driving for work, there has been a need to determine their business-related driving expenses. Unfortunately, this is not as easy as collecting a handful of gas station receipts after each trip.

To calculate their actual expenses of driving for business, employees must track their business mileage and their associated costs for fuel, repairs, insurance, and depreciation, along with several other driving costs. This can be a daunting task for already-busy employees. To address this, the IRS developed their own standard business mileage rate which employees can use to calculate their tax-deductible business costs.

Though the IRS rate is designed for tax-deduction purposes, many companies use this rate to reimburse their mobile employees—but the IRS rate is far from perfect.

The History of the IRS Rate

The business travel industry developed alongside the modern automobile. As vehicles became more common in the early 1900s and more employees began using their vehicles for work, the need to determine business vehicle expenses grew in importance. However, calculating true costs by manually tracking and reporting all the expenses associated with driving for work can create a huge administrative burden.

Recognizing this challenge, the IRS began working with reimbursement consultants to determine a national business mileage rate each year based on the previous year’s prices. This flat mileage rate, also known as the “safe harbor” rate, provides a simple way for employees to calculate the tax-deductible business costs they incur throughout the year. Many companies also turn to this rate as an easy way to reimburse employees rather than taking on the burden of calculating employees’ actual costs of business travel.

Companies also use the IRS rate for reimbursement because, unlike flat car allowances, it can be paid tax-free (hence the “safe harbor” designation). The IRS rate is inaccurate though. Since it’s a static rate based on historical data, it fails to account for differences in costs from location to location and for fluctuations in fuel prices.

Inaccurate reporting

In the face of plummeting national gas prices, which fell nearly 40% in 2014, the IRS actually increased their standard business mileage rate from 56 cents per mile to 57.5 cents per mile for 2015. This raise brought the mileage rate to its second-highest point in history, behind only the 58.5 cents-per-mile rate of 2008—when gas prices peaked at $4.11 per gallon.

This is not the first time the average cost of gas and the IRS mileage rate have so dramatically parted ways. The rate fell in 1999, from 32.5 cents per mile to 31 cents per mile, as nationwide gas prices soared. This discrepancy, along with that of this year’s rate increase, highlights the inaccuracies associated with using the IRS rate for reimbursement. When the IRS rate is too low, employees end up paying for business costs out of pocket. When it’s too high, it means companies are paying employees more to spend less.

Not all employers can choose how they reimburse their employees either. Based on new language in the 2015 defense-spending bill, the General Services Administration is now legally required to use the IRS rate to reimburse all federal workers. Other companies tied to the IRS’s inflated mileage rate, either by convenience or convention, have paid more in 2015 as well.

The Bottom Line

Relying on the IRS rate means trusting last year’s information to reimburse this year’s workers—an inaccurate method that ultimately ends up costing companies when their mobile employees are over-reimbursed. For companies interested in lowering costs and ensuring equitability, providing individualized reimbursements that account for each employee’s unique costs is the best option.

While calculating individualized reimbursements may seem overwhelming at first glance, technology platforms like Motus remove the administrative burden for companies. With the right partner to help manage their mobile workforce, companies can provide fair, accurate, and defensible reimbursements that meet the needs of their rapidly-mobilizing workforce while also ensuring a cost-effective program.

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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