On December 29, the IRS released the 2023 federal mileage rate for business use. The exact amount of the increase is less important than how the federal mileage rate is used.
The IRS has raised the business mileage rate by 3 cents to 65.5 cents per mile for 2023. The IRS generally uses the average costs of the previous year, plus indicators for the coming year, to determine appropriate mileage rates. Due to the unexpected spike in gas prices during 2022, the IRS raised its business rate midyear from 58.5 cents-per-mile to 62.5 cents-per-mile.
Gas prices have now fallen, but overall inflation in vehicle-related costs remains very high. When considering the significance of the 2023 business mileage rate for your organization, it is important to keep in mind two things:
Both of these truths factor into major misconceptions about vehicle reimbursements. And these misconceptions highlight why businesses need to transition away from using a standardized mileage rate to reimburse employees for vehicle expenses.
Fuel is the vehicle expense people most think of when they think about reimbursement with the federal mileage rate. Prices at the gas pump are the expense drivers most frequently experience. But other expenses factor into business reimbursements for vehicles:
Mileage rates are good at reimbursing expenses that increase relative to the amount you drive. Fuel and various maintenance costs fall into this category. But insurance, depreciation, and various taxes and fees are more tied to time than to distance. And these typically form a larger portion of reimbursable expenses.
That's why the 2023 IRS mileage rate will tend to under-reimburse low-mileage drivers and over-reimburse high-mileage drivers.
The IRS mileage rate is designed to help self-employed individuals deduct work-related mileage as a business expense. The rate is based off of average expenses countrywide, which works fine for estimated business expenses of a large pool workers nationwide. Business reimbursements for employees is a different matter.
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. Few employees will drive the average number of miles and experience the average number of costs.
Accuracy is very important when it comes to delivering fair and equitable reimbursements to employees. Employees deserve it. And employers need to know that they are not overspending in mileage reimbursements due to high-mileage drivers.
Here are a number of blog posts we have published explaining reasons to avoid using the IRS business mileage rate for reimbursement purposes:
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 – such as when gas prices spike unexpectedly or drop quickly. FAVR can accurately reimburse high-mileage drivers (saving the employer money) and accurately reimburse low-mileage drivers (increasing fairness to the employees).
Check out our side-by-side comparison of FAVR reimbursement with IRS mileage reimbursement, or our savings calculator: