Midyear Mileage Deduction Update

For the most part, the IRS releases its annual mileage rate updates for the following year in December. These rates are used to determine the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. The rates are determined through either an annual study on the fixed and variable costs of operating a vehicle. For the medical/moving rates, the changes are only based on variable costs. While taxpayers can track and claim actual expenses related to these qualifying activities, the mileage deduction rates make the process much simpler. There are specific rules that apply when changing deduction methods.

Typically, this information is released in December of the preceding year to ensure taxpayers have enough time to account for the changes. However, 2022 is a different story as significant price changes occurred due to inflation. It is no surprise that the cost of fuel has sharply increased over the past few months. As such, the IRS has issued a rare mid-year mileage deduction update that allows taxpayers to claim an increased deduction for qualifying driving activities. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Midyear Mileage Rate Increase

As of July 2022, nationwide fuel prices are $4.67, though most Western states average higher. And even though gas prices are falling, they’re still at record-highs – and almost 50 percent higher than a year ago, when one gallon of regular unleaded was $3.14. Since July and August tend to be peak travel months, the mileage rate increases have come at a great time.

Gas prices aren’t the only vehicle expenses that are higher. Inflation has affected costs across the board, from parts to repairs.

So, in a rare but not altogether unexpected move, the IRS updated its mileage rates for travel beginning July 1, 2022. The increases are reflected below. Overall, the rates are about six percent higher for business use and 22 percent higher for medical or moving purposes.

The military rate only applies to active-duty personnel relocating to a permanent change of station through 2025, and the charitable rate is determined by statute.

Midyear rate increases occurred just twice in the last decade or so: 2008 and 2011. In both those years, rising fuel prices were also the top contributing factor. This year, Congress requested the rate increase twice, once in March and again in May.

In normal years, documentation is key; in years where there’s a midpoint increase in rates, it becomes even more important. Taxpayers may find it confusing to wait until tax time in 2023 to reconcile a years’ worth of records that are combined. It’s recommended to keep a log of miles either on an app or in the vehicle to keep track of the date, total miles driven, and purpose of the trip.

The IRS won’t accept recreated records, and taxpayers must be able to produce actual receipts, invoices, and/or canceled checks.

When to Use the Standard Rate for Mileage Reimbursement

Taxpayers who own vehicles outright usually have the option to use the standard rate or the actual costs method. Sometimes, there isn’t a choice. For example, the standard rate must be used in the first year a vehicle becomes eligible for business use. After that, taxpayers have the option of calculating actual costs. Leased vehicles must also only use the standard mileage rate. That applies for the duration of the lease term, including renewals.

In any case, there are other requirements the taxpayer must meet to use the standard mileage deduction.

The taxpayer must not have:

• Operated five or more cars at the same time, like in a fleet
• Claimed a depreciation deduction for the vehicle using any method other than straight-line
• Claimed a Sec. 179 deduction or special depreciation allowance on the vehicle
• Claimed actual expenses after 1997 on a leased vehicle

Calculating Actual Costs for Business Use of a Vehicle

To get a better deduction for the business use of a vehicle, taxpayers who own their car usually have the option of calculating actual costs instead. These include:

• Maintenance and repair costs
• Insurance payments
• Depreciation and/or lease payments
• License and registration fees
• Tires
• Gasoline
• Oil

Taxpayers would add up all costs associated with operating the vehicle according to the miles driven for business purposes. Tolls and parking fees would be separately deductible regardless of the calculation method: standard or actual expenses.

There are limits to how much depreciation can be deducted. The IRS has more information here.

Note that if the vehicle is used for both personal and business purposes, only mileage associated with the business or other qualified purposes may be used to calculate the deduction.

What’s a FAVR Plan and Why Does It Matter for Mileage Reimbursement?

Employers have another option besides issuing tax-free mileage reimbursements to employees. A Fixed and Variable Rate (FAVR) allowance plan lets employers reimburse employees who use their own vehicles for business purposes for both fixed and variable costs. Fixed costs include insurance, registration, and taxes. Variable costs are gas, tires, maintenance, and repairs.

A FAVR allowance plan would be used instead of the standard mileage rate. Both requirements below must be met and documented.

• The vehicle cost can’t exceed $56,100 for cars, trucks, or vans. This rate is effective for 2022.
• The employee must produce records demonstrating at least 5,000 miles driven during a calendar year or 80 percent of the annual business mileage of the FAVR allowance, whichever is greater.

Employees who are only covered under a FAVR allowance for part of a year can prorate the above limits monthly.

Employee payments must be made at least quarterly, so there may be more legwork to do to calculate actual costs throughout the year. There’s a benefit, though.

One study estimates that employers using the FAVR allowance rather than the IRS standard mileage deduction saved more than $1.4 billion between 2022 through 2021.

Another, simpler option would be to reimburse employees a flat monthly rate for business use of their vehicle. A variable rate could be used for separate locations according to costs in a specific geography.

Deducting Mileage Reimbursement For Fleet Vehicles

A fleet of five or more vehicles must use the actual costs method for mileage reimbursement. From there, it can get complicated.

Businesses must keep mileage logs for each vehicle. Those records should include:

• Purpose and date of trip
• Starting location and the destination
• Starting and ending mileage on the odometer
• Total trip mileage
• Tolls and other related trip expenses

Fleet management software can help businesses stay up to date on their records.

Contact Us

The recently announced increased mileage deduction rates are welcome news for many Atlanta businesses adversely impacted by the recent fuel cost spikes. It facilitates much-needed additional tax savings. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.