Effective July 1, the IRS has increased the standard business mileage rate for 2022 by 4 cents per mile to 62.5 cents per mile. Due to the inherent limitations of reimbursing with this mileage rate, businesses that use the IRS mileage rate for reimbursements may run into trouble.
What is the 2022 IRS standard business mileage rate?
Every year, the IRS releases a set of standard mileage rates for tax deduction purposes. In June of 2022, due to high gas prices, the IRS has approved an additional increase. Starting July 1, these rates will be:
- 62.5 cents per mile driven for business use (up 4 cents from January, and up 6.5 cents from 2021)
- 22 cents per mile driven for medical, or moving purposes for qualified active-duty members of the Armed Forces (up 4 cents from January)
- 14 cents per mile driven in service of charitable organizations (remains unchanged)
The standard business mileage rate is often used by businesses as a cents-per-mile reimbursement. However, this rate was developed as a tool to estimate vehicle expenses for tax deduction purposes. It was not designed to be a reimbursement rate.
Because the IRS business rate is really a tax tool, using it as a reimbursement tool creates problems, including both overpayments and underpayments. While the IRS does treat the standard business rate as a simple measure of whether a vehicle reimbursement should be taxed or not, actually using the rate to reimburse employees is not a good idea.
(Note: the current tax code does not allow employees to deduct mileage during the tax years 2018-2025.)
Why did the 2022 IRS business mileage rate increase?
The IRS explains its mileage rate calculations in the following manner:
The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
Given that gas prices in November 2021 were averaging $3.42/gallon, more than a dollar higher than November 2020, when the average price was $2.11/gallon, it is no surprise that higher variable costs would be expected. Now that in June gas prices are averaging $5/gallon, another increase was necessitated.
Furthermore, vehicle prices remain at record levels, with both new and used vehicles commanding high values due to supply and demand challenges over the past two years.
But no matter the reasons for the 2022 rate increase, nothing has altered the fundamental problems with using the IRS mileage rate for vehicle reimbursements. The key problem is that using a mileage rate to reimburse both "fixed and variable costs" creates inequalities for employees.
Using the IRS mileage rate for reimbursements
Using a tax tool as a reimbursement tool creates problems. Here are two reasons why:
1. The 2022 IRS mileage rate cannot reimburse business travel expenses.
Many organizations opt for the IRS mileage rate because it is easy, tax-exempt, and seems defensible. They deem it the "Safe Harbor Rate" because, as long as they do not exceed it, no taxes are applied to the reimbursement payments. But while the Safe Harbor Rate works for tax deductions, it cannot provide the transparency necessary for defensible reimbursements – it does not reflect the actual expenses of business travel.
The 2022 IRS mileage rate of $.625/mile was derived from a blend of vehicle cost factors averaged out from across the U.S from 2021 and the first half of 2022, including average gas prices, insurance costs, and depreciation for a vehicle driven an average number of miles. 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 2021 was $1,555 for a year of full coverage, but in the state of Florida that number was $2,587. 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 2022 IRS mileage 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, cost variances between vehicle expenses and territory sizes render the IRS rate inequitable.
If all employees experienced the same costs and drove similar amounts, 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 56 cents per mile, the 2021 rate, Driver 1 received $6,720 in annual reimbursements, while Driver B received $13,440.
If we presume both drivers incurred the same fixed annual ownership costs of $5,000, Driver 1 was reimbursed $1,720 or 14.3 cents per mile in addition to the $5,000. Was that $1,720 enough to cover all of that driver's distanced-based costs such as gas, oil changes, tires, and maintenance?
Driver 2 received $8,440 or 35.2 cents per mile on top of the $5,000 – a difference of 20.9 cents per mile. While it is true that Driver 2 experienced higher vehicle depreciation as a result of the higher number of miles driven, the moderately higher cost of depreciation does not equal the 19.9 cents-per-mile difference between Driver 1 and Driver 2. Nor do the significantly higher distanced-based costs of gas, oil, etc. add up to that entire additional amount.
The bottom line: Driver 2 is overpaid. The IRS mileage rate tends to over-reimburse high mileage drivers and under-reimburse low mileage drivers.
Using an IRS tax deduction rate as a business mileage reimbursement in 2022
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: