While it is too soon to know for sure what the IRS standard business mileage rate will be in 2021, there are steps your organization can take to stay responsive to any changes.
What will the 2021 IRS mileage rate be?
In order to anticipate the 2021 federal mileage rate, it is helpful to know how this mileage rate is calculated. For 2020, this mileage rate is 57.5 cents-per-mile, just slightly less than it was in 2019 (58 cents-per-mile). Each of these rates was generated by a set of average vehicle-related costs across the U.S. from the previous year.
So the IRS rate for 2021 will be largely based on average vehicle-related costs across the U.S. for 2020. That makes it a challenge to predict, since 2020 has been anything but an average year.
In March, right as the COVID-19 pandemic hit, Russia and Saudi Arabia were battling over oil production, sending the oil markets into a deep dive that was exacerbated by the reduction in demand across the world due to decreased driving as people traveled less and worked from home. The U.S. Energy Information Administration expects oil prices to remain low for the foreseeable future, indicating that retail gas prices will not rise significantly.
Other vehicle expenses in 2020 decreased due to people driving less, such as maintenance costs (since driving less means less maintenance) and auto insurance costs. However, these expenses will likely rebound as people drive more. Furthermore, the prices of used vehicles have skyrocketed due to increased demand and decreased supply of new vehicles, though those trends should moderate.
All this indicates that the 2021 IRS mileage rate is more likely to decrease than increase, but it all depends on how much the unusual aspects of 2020 factor into next year's rate. And that brings up a significant drawback in using the IRS business mileage rate for vehicle reimbursements.
Why businesses should reconsider using the IRS rate for mileage reimbursements
If the IRS mileage rate is primarily based on the average vehicle costs from the previous year and indications of what will happen in the coming year, how accurate will it be?
No one took into account a global pandemic when calculating the 2020 mileage rate. So that $0.575/mile rate probably proved significantly higher than what was actually warranted. On the other hand, plenty of workers didn't collect any mileage reimbursement during the periods when they worked entirely from home, even though they still faced fixed monthly expenses (e.g. insurance, taxes, depreciation) on a vehicle their employer expected to be available as soon as it was safe to travel again.
The inherent inability of the IRS standard mileage rate to align with a specific employee's actual vehicle expenses at any given time undermines its usefulness as a reimbursement tool.
And that's because it was never designed to be a reimbursement tool in the first place. Instead, it was designed to be a tax deduction tool, providing a ballpark figure for overall business vehicle expenses in a given year. Using national averages works fine for calculating taxes for a large population, but it doesn't work so well for individual employees who need an accurate reimbursement.
Employers don't want to be over-reimbursing employees; nor do employees want to be under-reimbursed. Yet, a standard mileage rate has the potential to do both, depending on the actual conditions faced by employees.
A fair, accurate vehicle reimbursement for 2021
As you consider employee reimbursement options for 2021, instead of anticipating a possible decrease to the IRS mileage rate, think outside the box and look for a tool that's more suitably designed for vehicle reimbursements.
Fixed and variable rate reimbursement (FAVR) is our recommended vehicle reimbursement tool. It stays more immediately responsive to sudden changes in the vehicle expense landscape – including both situations when gas prices spike unexpectedly and situations when drivers are stuck at home unexpectedly. Prepare for the uncertainty of 2021 with a more sophisticated, flexible tool.
Check out our side-by-side comparison of FAVR reimbursement with IRS mileage reimbursement, or read our in-depth ultimate guide to FAVR by selecting the image below.