For the first time in two years, the optional standard mileage rate is going up, as announced by the IRS. Beginning on Jan. 1, 2022, the increase affects businesses and organizations using a car, van, pickup, or panel truck for company, medical, moving or qualified active-duty purposes. Here’s why the IRS is increasing the rates and what it means for you.
| Type | Rate | Change in Rate |
|---|---|---|
| Business Miles Driven | $0.585 | Increased by 2.5 cents |
| Medical or Moving miles driven for qualified active-duty members of armed forces | $0.18 | Increased by 2.0 cents |
| Miles driven for charitable organizations | $0.14 | No change set by statute and needs an act of congress to change |
What affects the standard mileage rate?
One might think that the price of gas and oil are the main reasons for the standard mileage increase, but there are a number of things that factor into calculating the rate. Each year, the IRS analyzes the total cost to own and operate a vehicle in the US. It then uses that information to determine the standard mileage rates for the upcoming year.
Some of the average expenses the IRS uses to calculate the rates include things such as:
- Depreciation of the vehicle ownership cost
- Fuel price
- Insurance
- Licenses, registration and taxes
- Tires
- Maintenance
The cost of owning and operating vehicles has been on a steady rise. As we look at the numbers that AAA calculated for owning and driving a car in 2021, the average cost was about $9,666, which is up from 2020’s $9,561 and 2019’s $9,282. It is expected to increase for 2022 as we deal with the rising cost of oil and gas prices and the other influences that are caused by inflation that we are experiencing. In addition, the instability of the supply chain and interruptions, labor shortages will all combine to increase the costs of 2022 by historical bounds.
Insurance rates will also likely continue to climb. S & P Global Market Intelligence’s Annual US Auto Insurance Market Report points to rising cost influences of repairing and replacing vehicles. With things like soaring inflation, instability of replacement parts and labor challenges it is having a negative effect on the profit margins of the underwriting of the insurance companies and we will see an increase of rates. It is projected that auto premiums can jump 5.4% or higher this year.
How will the standard mileage increase impact business?
One thing that needs to be watched for budget busting is the increase in the mileage reimbursement can have. For every 1,000 miles driven your employee reimbursement’s cost increases by $25. To see how that can affect the bottom line if you have 100 employees that average 5,000 miles a year the increased cost for 2022 would be $12,600 for the year.
How to calculate a mileage deduction
There are two ways to calculate the deduction for the business use of vehicles:
Standard Mileage Dedication
This requires the company and its employees to keep detailed track of the miles driven for business related mileage. The miles are tallied up and multiplied by the rate allowed. For 2022, that rate is 0.585. There are a number of complex rules that apply to help sort through this. We here at Tolbert CPA are here to help.
Actual Expenses
If tracking the miles is too complex, the actual expenses that are incurred while using the vehicle for business purposes can be added. These may include things such as:
- Depreciation
- Garage rent
- Gas and Oil
- Insurance premiums
- Licenses
- Lease Payments
- Parking Fees
- Registration Fees
- Repairs
- Tires
- Tolls
Medical Mileage deductions
If a vehicle is used for what is considered “medical reason” the miles can be deducted at the rate of 0.18 cents per mile. This includes things like driving to doctor visits, hospital or medical facilities. Driving a child or other person who needs medical care to care.
If the medical mile rate deduction isn’t used, the actual unreimbursed out of -pocket expenses can be deducted, but they must directly relate to medical purposes.
Important things to note when reimbursing employees for miles driven
- Under the Tax Cuts and Jobs Act, employees are not allowed to write-off unreimbursed business mileage. There could be legal consequences to companies if it is proven they did not make reimbursements.
- If the Modified Accelerated Cost Recovery System or Section 179 deductions is used then the business standard mileage can not be used on the vehicle as well.
- Fixed and Variable Rate (FAVR) allowance is an alternate method for employee vehicles that are used for business. This can help avoid over/under paying of your employees’ vehicles use for business purposes
- The IRS standard mileage rate helps to hold businesses accountable, but it does not call into count for different regions fluctuations of vehicle-related expenses.
How to report your deductions to the IRS
When deducting mileage for moving, medical or charity purposes, you will need to itemize them on Schedule A with the Form 1040.
If you are self-employed, the mileage deductions are claimed from the Schedule C with your other business expenses.
While it can be overwhelming at times to track and claim these deductions, it can make a significant impact on the overall tax liability.
We here at Tolbert CPA are available to help with questions you might have regarding standard mileage rates and the 2022 standard mileage increase.
