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The Biggest Flaws of the IRS Mileage Reimbursement Rate

Written by mBurse Team Member   |   Dec 2, 2024 6:00:00 AM
3 min read

The IRS mileage rate was designed to be a tax deduction tool for individual taxpayers. This federal rate is now the norm for business mileage reimbursements. But using the IRS rate has three major flaws.

3 reasons NOT to use the IRS Mileage Rate for reimbursements

The IRS business rate has become the standard rate for mileage reimbursements. It’s easy to calculate at 67 cents per mile for 2024. However, with that ease comes hidden costs.

The IRS mileage reimbursement rate, or federal mileage rate, is not the best way to compensate employees for travel. Why? For three glaring reasons:

1. The IRS business rate does not reimburse accurately.

In a nutshell, the federal rate over-reimburses high-mileage travelers and under-reimburses low-mileage travelers. These inequitable results can lead to employee dissatisfaction as well as high costs. Controlling costs will be especially difficult if you employ a lot of high-mileage drivers.

Each employee experiences different costs, so how can only one rate reimburse all employees fairly? As an auto reimbursement method, the government mileage rate falls short. This is because the IRS uses national average costs to derive the rate.

How the IRS mileage rate is calculated

Here are three of the six components for calculating the IRS business mileage reimbursement rate: 

  • An average of last year’s gas prices
  • Costs based on 14,000 total miles
  • An average of last year’s insurance costs

The other three cost variables also move the calculations even further from being accurate. Some employees live in areas with high gas prices and insurance costs. In these cases, the IRS rate may not be enough to cover their expenses, especially if they are not a high-mileage driver.

Fixed vs. variable costs and mileage

Unlike variable costs like fuel and maintenance, fixed costs like depreciation and insurance do not increase much with mileage. But a mileage rate is more than just a gas reimbursement rate. A driver has to drive a certain number of miles each month to cover these fixed expenses, which amount to more than half their total costs. This is why the IRS rate often under-reimburses low mileage drivers.

For 2023, the federal rate was 65.5 cents per mile. Out of that 65.5 cents per mile, the IRS reported that depreciation counted for 28 cents per mile. However, a driver who drives below the average number of miles is not covering their vehicle's depreciation through that 28 cents per mile.

2. The IRS standard mileage rate promotes excess driving.

Cost control poses one of the biggest challenges effective organizations must face. The federal mileage rate encourages "driving for dollars." If you pay the IRS rate for mileage reimbursement, your costs depend on the accuracy of the rate and of employees' mileage reports.

Business mileage fraud

Let’s consider the factor of employee-reported mileage. When providing an unquantifiable mileage rate, it is unreasonable to expect your employees to accept the rate as is. When gas prices or insurance rates increase yet the mileage rate remains the same, employees will drive more to offset costs.

Or worse, employees may inflate their mileage totals. This is called mileage fraud, and it is more common than you might think.

Gas prices vs. mileage

To protect their income from local increases beyond the average insurance costs and fuel prices, employees may

  • Overstate mileage
  • Round mileage up
  • Fabricate trips/mileage

No one wants to suspect their employees of dishonesty. But is it right to position employees to have to choose between acting with integrity and covering cost deficits? In the end, many employees will act in their self-interest. Check to see whether mileage for reimbursement has risen over the past few years as prices have risen.

Accurate mileage tracking 

One way to curtail inaccurate mileage reports is to adopt a mileage tracking app. When you automate mileage capture, you take out the guesswork and require extra effort to fabricate data. A good mileage tracker will not only provide accurate mileage but also deliver valuable productivity reports.

IRS rate vs. FAVR

Another way is to stop paying the IRS standard mileage rate and calculate an accurate rate for your employees. Base the rate on realistic costs for their territories. One way to calculate an accurate rate is to used the fixed and variable rate model, also known as FAVR. This is an alternate vehicle reimbursement plan promoted by the IRS.

Try comparing costs of paying the IRS business rate vs. a FAVR rate that matches your employees' variable costs.

IRS Rate v. FAVR - Calculate Savings

3. The IRS mileage reimbursement rate may violate labor laws.

The federal mileage rate is the norm for business mileage reimbursement in states that require employer reimbursements. These states with expense indemnification labor codes include California, Illinois, and Massachusetts, as well as the cities of Seattle, WA, and Washington, DC. 

But what if the IRS mileage rate does not always comply with these laws?

Labor laws and low mileage drivers

For low mileage drivers, there’s often a gap between expenses and what the IRS rate pays. These employees can seek recourse under labor codes in the three states with expense indemnification laws. Six other states can also enforce sufficient reimbursement of expenses. In employee-friendly states, it is crucial to pay a rate you can quantify.

In California, with its ever-increasing gas prices, the nationalized IRS rate may increasingly under-perform. Businesses operating in California should especially pay attention to low-mileage and mid-mileage drivers.

Complying with state labor laws

There are alternatives to the IRS rate that will properly reimburse all employees, control costs, and comply with labor laws. You could adopt a "smart" mileage rate that adjusts up and down with gas prices. Or you could look into a FAVR program that separates fixed and variable costs and reimburses them differently.

The key is to ensure that your reimbursements reflect both the local costs and driving habits of employees. A national reimbursement rate cannot do this. The strength of a FAVR plan is its use of local cost data to determine reimbursement rates.

The IRS mileage rate for business in 2025

The nice thing about using the IRS mileage rate for reimbursement is its ease. It is also easy to lose control of costs and to create dissatisfied employees. In 2025, whether the rate goes up or down, the three biggest flaws will remain the same.

Now is the time to take control of your costs, and evaluate your car reimbursement policy. Explore new mileage tracking and reimbursement options today.

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