Can the IRS Mileage Rate Increase Match Record Gas Prices?

Written by mBurse Team Member   |   Jun 10, 2022 1:51:06 PM
2 min read

As of July 1, the IRS has increased the 2022 business mileage rate by 4 cents to 62.5 cents per mile. With U.S. gas prices averaging around $5 per gallon, the IRS made a rare move to hike rates mid-year. But will it be enough to help workers offset fuel costs?

Is the 2022 IRS mileage rate increase enough?

The answer is that it depends on what the rate is being used for. Let's first remember that the IRS standard mileage rates are calculated for tax deduction purposes. The standard business rate is designed to help a worker calculate their business expense deduction without having to add up all the receipts from business-related vehicle expenses.

For tax years 2018-2025, however, employees cannot deduct business expenses. Only self-employed workers can. So the 4-cent increase will certainly help business owners when tax season rolls around.

The rate increase will also help the many employees who receive the IRS mileage rate for mileage reimbursement purposes. But this is where it gets complicated.

Because the standard mileage rate is designed for tax deductions, it represents an average of the costs for American drivers. This means that drivers who face above-average costs may find that the rate is not enough to reimburse their costs. For example, while the average U.S. gas price is $4.99/gallon, it is $6.42/gal in California, with some localities topping $7/gallon.

IRS mileage rate reimbursement complications

Aside from complications related to regional cost differences, there are also differences in how drivers accrue costs. Drivers in urban areas who face a lot of stop-and-go traffic will face higher expenses per mile than those who experience mostly highway miles. 

Drivers who drive a lot face lower expenses per mile than drivers who drive fewer miles. This is because a large percentage of vehicle costs are not directly dependent on miles driven (e.g. insurance, depreciation, etc.).

When determining whether a mileage rate is appropriate for reimbursements, these various complications must be considered. A driver who experiences average costs-per-mile will find the IRS standard rate sufficient. But what about someone who works in the Los Angeles area, facing heavy traffic and high gas prices?

What if another worker for the same organization covers a mostly rural territory in the Great Plains or the Deep South, where gas prices and other vehicle costs run below average? Does it make sense for both to receive the same mileage rate?

Alternatives to paying the IRS rate for business auto reimbursements

Right now, no matter how an employer chooses to reimburse employee auto expenses, it's going to be costly. The key is to find a method that can match today's high gas prices while preventing the over-reimbursement of employees who work in less expensive places.

In states like California, an accurate reimbursement method is required by law. In fact, it is questionable whether the IRS mileage rate should still be considered a legitimate way to comply with CA Labor Code 2802, given the state's much higher-than-average vehicle costs.

The most desirable reimbursement method is one that rises and falls with gas prices, is tailored to local cost factors for different employees, and is defensible when it comes to labor codes. The fixed and variable rate (FAVR) reimbursement meets these criteria. You can calculate the difference between paying the IRS rate and FAVR using the button below.

IRS Rate v. FAVR - Calculate Savings

Or you can get an in-depth look at this innovative approach to auto reimbursements here:

FAVR car driving on highway

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