Vehicle Ownership and Operating Cost Analyses Reveals Inflation Underpinning New Mileage Rate, Provides Guidance on Vehicle Reimbursement Best Practices
The Internal Revenue Service (IRS) announced the 2023 business mileage standard rate of 65.5 cents, calculated with data provided by Motus.[i] As a leader in reimbursement solutions for the mobile workforce, Motus cultivates a deep understanding of total costs of vehicle ownership and usage. Using insights from the world’s largest retained pool of drivers, the company conducts statistical analysis of automotive data from the prior year to advise the IRS about trends in business driving and help inform the annual rate, which is the amount an individual can deduct for business vehicle expenses. Motus cost data and analysis has underpinned the IRS business mileage standard for more than 40 years.
The 2023 business mileage standard rate increased to 65.5 cents from the 2022 mid-year adjustment of 62.5 cents and will go into effect January 1, 2023. Driving costs have increased overall in 2022 due to some key factors and trends, including:
- Significantly higher fuel prices, which rose 49% for regular gasoline and 55% for diesel fuel over the six months ending June 30, 2022.
- Surging vehicle acquisition costs due to ongoing supply chain constraints. The average sale price for a new vehicle grew by 11.9% year-over-year.
- Considerable increases in vehicle ownership and maintenance expenses. Drivers spent an average of $10,728 on routine service, insurance, registration and taxes in 2022, up from $9,666 in 2021.
In addition to individual tax deduction, the IRS business mileage standard rate offers a tax-free threshold for reimbursements that U.S. employers make to employees. Organizations are typically required to reimburse their mobile workforce for the business use of the personally owned assets that are necessary to fulfill work-related responsibilities, which includes vehicles. The IRS rate is optimal for low-mileage drivers who travel fewer than 5,000 business miles per year however, it does not account for differences in vehicle ownership and operating costs, which can fluctuate throughout the year and are geographically specific. This means businesses that rely on the rate to reimburse mid- and high-mileage workers are likely providing reimbursements that do not reflect actual driving costs. By treating all employees’ expenses as the same regardless of location or individual situations, reimbursement using the IRS rate creates winners and losers by over or under reimbursing employees for their costs.
“We’re facing extraordinary economic volatility, which has contributed to wide fluctuations across vehicle costs. While some organizations have relied on the IRS standard mileage rate for years, it’s time for business leaders to prioritize reimbursement methodologies that account for their mobile employees’ individual costs, especially those who depend on their cars to perform their jobs successfully,” said Todd Gebski, Chief Strategy and Marketing Officer at Motus. “Leveraging the IRS’ Fixed and Variable Rate (FAVR) reimbursement methodology, Motus helps organizations account for all of the cost components related to owning and operating a vehicle, ensuring their employees are equitably reimbursed regardless of how volatile the market becomes.”
The fixed and variable rate (FAVR) methodology was designed to more accurately and fairly reimburse employees for the exact cost of driving for work and is paid tax-free under IRS Revenue Procedure 2019-46. Motus calculates that organizations have saved more than $1.4 billion using FAVR reimbursement compared to the IRS business mileage standard since 2011.
For more information about the IRS business mileage standard rate, mileage reimbursement and vehicle management options, please visit https://resources.motus.com/.