The Internal Revenue Service recently issued the 2021 optional standard mileage rates. These rates, which adjust every year to account for inflation of fuel costs, vehicle cost and maintenance, and insurance rate increases, will once again affect the way a company reimburses their mobile workers. Specifically, the IRS mileage rate is a guideline that businesses use to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. Beyond announcing the rate change, we have a few reminders and tips surrounding this reimbursement allowance.
As of January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:
- 56 cents per mile for business miles driven, down 1.5 cents from 2020
- 16 cents per mile driven for medical or moving purposes, down 1 cent from 2020
- 14 cents per mile driven in service of charitable organizations; the mileage rate for service to a charitable organization is not alterable by the IRS. Instead, it must be changed by a Congress -passed statute.
Have you considered…
Under the Tax Cuts and Jobs Act, employees are not permitted to write off unreimbursed business mileage. If your company does not make up for this reimbursement, it could face legal consequences.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.
Taxpayers also have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. The actual expense method often produces a significantly different result. You will want to talk with your CPA to determine which method yields the larger deduction.
The IRS rate was intended to function as a reimbursement cap. Today, the rate holds businesses accountable, but it doesn’t account for fluctuations in vehicle prices across city, county, and state lines. For companies whose employees use their vehicles for work, there is an alternative to the standard mileage rate. The Fixed and Variable Rate (FAVR) allowance preserves reimbursement equity and helps businesses avoid over- or underpayment to employees. To find out more about this IRS recommended reimbursement methodology or if you have any questions about the IRS Standard Mileage Rate, please contact one of our professionals today.
Stay safe and healthy!
Walter & Shuffain, P.C.