IRS gives business drivers bigger break to offset gas shocks

While gas prices have come down significantly from their June peaks, the continued pain at the pump has led the Internal Revenue Service to offer some relief to business travelers.

Effective in July, the IRS increased the standard mileage rate for business use of a vehicle by 4 cents to 62.5 cents per mile. The higher allowance remains in place until year-end.

A midyear adjustment like this isn’t common, with the agency only having implemented such changes in 2008 and 2011, but it’s not surprising, experts say.

“There are multiple factors impacting drivers,” says Karen O’Byrne, president and CEO of Motus, a provider of mobile workforce management software that supplies the data to the IRS to help them calculate the mileage rate. “The rising fuel prices have been the most painful and obvious.”

But she said other inflationary factors are also squeezing drivers’ wallets, including rising costs on everything from tires to normal maintenance.

Hence the increased mileage rate, O’Byrne says. The IRS normally updates mileage rates once a year in the fall for the next calendar year. 

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs, says the IRS. This rate’s also used as a bench mark by the federal government and many businesses to reimburse employees for mileage. 

Simpler method

Most businesses use the standard mileage rate to reimburse employees for business driving, says Amy Bloom, a tax partner at UHY LLP, an accounting and advisory firm, which has local offices in Manhattan and Melville. “It is much easier to simply track your mileage,” she says.

But for those self-employed, she finds most opt to calculate the actual car expenses instead of taking the standard mileage rate.

“The more you use the car the more likely it will benefit the self-employed to use actual expenses,” Bloom says.

But this requires more record-keeping, she notes, adding “some people don’t want to be bothered keeping detailed records of all the auto expenses that they incur.”

To calculate actual expense, you must determine what it actually costs to operate the car for the portion of overall use of the car that's business use, according to the IRS. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of total miles driven that are business miles.

It's no wonder “most people like to use the standard mileage rate because it’s simple and easier,” says Robert Tobey, a tax partner at Grassi Advisors & Accountants in Jericho and a member of the American Institute of CPAs' tax policy and advocacy committee.

For many small business owners, actual car expenses could add up to a larger reimbursement come tax time, he says.

But consider that if you are self-employed and your car’s leased, you can’t use the standard mileage rate, says Tobey.

If you are uncertain which to use, it pays to track both actual expenses and mileage and then figure out which will be more beneficial come tax time, he says.

Some companies use the fixed and variable rate (FAVR) allowance, an IRS-approved vehicle reimbursement plan to calculate both fixed costs and variable costs, says O’Byrne. She noted Motus offers FAVR as an option to clients via an app they can use to help calculate and manage reimbursement costs. FAVR is generally used by employers with employees driving more than 5,000 miles annually, she says.

Matt Rosen, 35, a part-time Uber and Lyft driver and co-administrator of the Long Island Uber and Lyft Network, a Facebook group of approximately 850 drivers, finds it easy to use the standard mileage rate.

As for the IRS mileage rate increase, he says “any type of relief helps in a sense, but it’s not going to enable a driver to not have to work harder.”
“It only went up four cents,” he said. “I don’t think four cents is a significant change ... not to keep up with cost of everything else going up.”

Pre-pandemic, he could fill his tank for about $65 and now it could be up to $100. Oil changes are also now $20 higher.

Rosen lives in Brooklyn, but drives Uber part time in the summer, often trekking to the Hamptons and Montauk.

“Gas is a big impact, especially for drivers like myself with an SUV or six-cylinder vehicle,” Rosen says.