The IRS mileage rate is a tax tool, not a business reimbursement plan. It creates inequities between employee reimbursements and undermines a company's ability to control costs.
Tax-free reimbursements and the IRS business mileage rate
If you are like many organizations paying a mileage rate, you are most likely using the IRS mileage rate. To avoid unfavorable tax implications, many companies offer a tax-free vehicle reimbursement program to their employees. While some take the time to carefully craft an IRS Accountable Plan based on actual vehicle costs, most organizations rely on a cents-per-mile reimbursement plan based on the IRS Standard Mileage Rate.
The IRS mileage rate is a tax-free plan that qualifies as an IRS Accountable Plan and is easy to administer. However, employers using or considering using the IRS mileage rate should weigh the problems with this reimbursement approach along with considering the type of mileage log required to manage reimbursements.
The central issue is that the IRS standard rate is a tax deduction tool, not a business reimbursement tool. Using the wrong tool for the task leads to two costly problems.
1. The IRS (tax) rate can't actually reimburse business travel expenses.
Many organizations opt for the IRS mileage rate because employers perceive it as easy, tax-exempt, and defensible. The reality is the Standard Mileage Rate is tax tool, a deduction guideline for taxpayers who choose a standard deduction—not for employers tracking business vehicle expenses diligently.
The rate is not transparent—it cannot reveal or reflect the actual expenses of business travel. One would assume that a reimbursement rate would be transparent to ensure you do not over-reimburse or under-reimburse your employees. The mileage rate, however, is derived from a blend of vehicle cost factors averaged out from across the U.S.
The IRS standard mileage rate is not representative of actual vehicle ownership and operating costs for any specific vehicle in any specific geographic area of the country. Many vehicle costs, such as insurance, gas, registration, and taxes vary by region. The IRS standard 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.
Employees select their personal vehicle based on lifestyle and personal choice. Some are fuel-efficient; others are gas guzzlers. This diversity of vehicles adds yet another variance factor. 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 IRS (tax) rate causes inequitable mileage reimbursements
Many organizations utilize the IRS standard mileage rate for all drivers – it doesn’t matter the territory costs or the territory size (i.e. the number of miles driven). On the surface, the mileage rate seems fair, because everyone gets the same rate of reimbursement. However, large cost variances between vehicle expenses and territory sizes render the IRS rate inequitable. Equal is just equal; it is not equitable.
If all employees experienced the same costs and territory sizes, a uniform reimbursement rate structure would make sense. But that’s not reality.
Example: 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 58 cents per mile (the 2019 IRS standard rate), Driver 1 will receive $6,960 in reimbursements in a year, while Driver B will receive $13,920.
If we presume both drivers incur the same fixed annual ownership costs of $5,000, Driver 1 is reimbursed $1,960 or 16.3 cents per mile in addition to the $5,000, while Driver 2 receives $8,920 or 37.2 cents per mile on top of the $5,000—a difference of 20.8 cents-per-mile. While it is true that Driver 2 will experience higher vehicle depreciation as a result of the higher number of miles driven, the cost of depreciation will equal the 20.8 cents-per-mile difference between Driver 1 and Driver 2.
The bottom line: Driver 2 is overpaid. Is this fair to Driver 1 or to the company?
Consequences of using an IRS tax deduction rate as a business mileage reimbursement
This inequity of rate could easily cause other 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. This typically occurs during times of volatile fuel costs. Employees often 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. The right mileage log will help manage time and costs – see how your mileage log stacks up.