The IRS has just released the 2020 standard business mileage rate. Whether your company uses the IRS for reimbursements or is considering it, here's what you need to know to be prepared for 2020.
What will the IRS mileage rate be in 2020?
On December 31, the IRS announced that the 2020 standard business mileage rate will decrease slightly to 57.5 cents per mile. That's just a half cent lower than the 2019 rate of 58 cents, not a huge difference.
The most important thing is actually to understand how this rate works and to evaluate whether it's a good fit for your organization when it comes to reimbursing employees for business vehicle expenses.
What is the IRS standard business mileage rate?
Each year, the IRS publishes mileage rates for tax deduction purposes, including the standard business rate, the medical rate, and the charity rate ($.575/mi, $.17/mi, and $.14/mi, respectively, for 2020). Self-employed taxpayers may use the business rate to deduct mileage accrued from work-related travel. Employees, however, may no longer use this tax deduction, which the tax reform eliminated for tax years 2018-2025.
Additionally, many organizations use the IRS business mileage rate as a cents-per-mile vehicle reimbursement for employees. The IRS mileage rate qualifies as a tax-free, IRS Accountable Plan and is easy to administer. It is often referred to as the Safe Harbor Rate because it represents the maximum reimbursement a company can pay tax-free without documentation tying the payments to expenses.
However, employers using or considering the IRS rate for reimbursements should remember that it was designed to be a tax deduction tool, not a business reimbursement tool. Using the wrong tool for the task leads to costly problems that will not change in 2020, no matter what the rate is.
1. The 2020 IRS standard rate can't actually reimburse business travel expenses.
Many organizations opt for the IRS mileage rate because it is easy, tax-exempt, and seems defensible. But while the Safe Harbor Rate works for tax deductions, it cannot provide the transparency necessary for defensible reimbursements – it cannot reveal or reflect the actual expenses of business travel.
The 2020 IRS mileage rate of $.575/mile was derived from a blend of vehicle cost factors averaged out from across the U.S from 2019. This means IRS standard mileage rate does not represent actual vehicle ownership and operation costs for any specific vehicle in any specific geographic area of the country.
Many costs, such as insurance, gas, registration, and taxes vary by region. For example, the average U.S. auto insurance rate in 2019 was $1,621 for a year of full coverage, but in the state of Michigan that number was $4,079! The IRS rate works as a tax deduction rate but not as a reimbursement rate. It cannot actually reimburse a real driver – unless that driver happens to match the average vehicle costs across the entire country.
The fact is, actual costs per mile will fall below the IRS standard rate for many drivers and exceed that same mileage rate for others, especially during times of high gas costs.
2. The 2020 IRS standard rate will deliver inequitable mileage reimbursements
Many organizations utilize the IRS tax deduction rate to reimburse all drivers – no matter the territory costs or the territory size (i.e. the number of miles driven). On the surface, this mileage rate seems fair, because everyone gets the same rate of reimbursement. However, large cost variances between vehicle expenses and territory sizes render the IRS rate inequitable. Equal is just equal; it is not equitable.
If all employees experienced the same costs and territory sizes, a uniform reimbursement rate structure would make sense. But that’s not reality.
Scenario: 2 drivers reimbursed with IRS tax deduction rate
Driver 1 and Driver 2 live in the same zip code, own the same year / make / model vehicle, purchase the same insurance coverage, and incur the same ownership expenses (registration, taxes, and license fees). Driver 1 has a driving territory that is more urban with a higher density of businesses and, therefore, drives 12,000 business miles per year. Driver 2 has a driving territory that is more rural and must drive further between business calls, traveling around 24,000 business miles per year.
At 57.5 cents per mile, Driver 1 will receive $6,900 in reimbursements in 2020, while Driver B will receive $13,800.
If we presume both drivers incur the same fixed annual ownership costs of $5,000, Driver 1 will be reimbursed $1,900 or 15.8 cents per mile in addition to the $5,000, while Driver 2 will receive $8,800 or 36.7 cents per mile on top of the $5,000 – a difference of 19.9 cents per mile. While it is true that Driver 2 will experience higher vehicle depreciation as a result of the higher number of miles driven, the moderately higher cost of depreciation will not equal the 19.9 cents-per-mile difference between Driver 1 and Driver 2.
The bottom line: Driver 2 is overpaid. Is this fair to Driver 1 or to the company?
Using an IRS tax deduction rate as a business mileage reimbursement in 2020
This inequity of rate could easily cause low mileage employees like Driver 1 to attempt to “equalize” or increase their mileage reimbursement if they feel they are not being adequately reimbursed. The mileage increase comes in the form of mileage buffering, or overstating business mileage. Employees may rationalize that since their rate does not adjust with rising fuel prices, adding a few miles will not hurt.
Because of mileage buffering, it is extremely important to employ a mileage log that tracks and calculates mileage automatically as well as holds employees accountable for their business travel.
Transitioning from the IRS mileage rate to a transparent reimbursement rate based on current geographical cost data will reduce reported mileage by as much as 20-30%. This is not because employees will drive less, but because the business mileage will not generate a reimbursement profit. Instead, the rate will accurately reimburse each employee based on their actual costs.
Contact mBurse today for a free mileage reimbursement assessment. If you want to stick with paying a mileage reimbursement rate, the right mileage log will help manage time and costs – see how your mileage log stacks up. If you are interested in exploring a transparent reimbursement model such as the fixed and variable rate reimbursement (FAVR), learn more here: