[UPDATED] We now know what the IRS standard business mileage rate will be in 2021. Here are steps your organization can take to stay responsive to these changes.
What is the 2021 IRS mileage rate?
The 2021 federal mileage rate for business is 56 cents per mile, which is 1.5 cents less than the 2020 standard business mileage rate. The IRS rate for 2021 is largely based on average vehicle-related costs across the U.S. for 2020 and expected average costs in 2021.
As we predicted, a number of unusual vehicle cost factors in 2020 drove the IRS mileage rate down. And it is the continued volatility related to vehicle costs that should have businesses rethinking the federal mileage rate for vehicle reimbursement purposes.
Factors influencing the new standard mileage rate
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. Then lots of people began working from home and driving less. Not surprisingly, the U.S. Energy Information Administration expects oil prices to remain low for the foreseeable future.
Other vehicle expenses in 2020 decreased as well due to people driving less, such as maintenance costs (since driving less means less maintenance) and auto insurance costs, though new and used car prices spiked.
All this indicated that the 2021 IRS mileage rate was likely to decrease but not by much, because of continued volatility and upredictability related to the pandemic. And that volatility brings up a significant drawback in using the IRS business mileage rate for vehicle reimbursements.
Why businesses should rethink the 2021 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 can 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 rate for 2021
As you consider employee reimbursement options for 2021, instead of greeting a decrease to the IRS mileage rate as a way to save money, 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.