Thank goodness, we still get plain old boring expected news from the IRS once-in-a-while. It’s honestly a relief, and oddly reassuring.
The IRS announced last week that beginning on January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
- 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020,
- 16 cents per mile driven for medical, or moving purposes for qualified active duty members of the Armed Forces, down 1 cent from the rate for 2020, and
- 14 cents per mile driven in service of charitable organizations, the rate is set by statute and remains unchanged from 2020.
Per the IRS, taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. Taxpayers can use the standard mileage rate, but must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.
Accounting Web explains the reasons for this year’s decrease in the rate.
While it may not feel surprising to see a lower rate in a down economy, this is only the second time in the past decade that there have been two consecutive rate reductions. The rate itself is calculated with data provided by Motus, which uses insights from the world’s largest retained pool of drivers to conduct statistical analysis of data from the prior year in order to inform the IRS about trends in business driving.
Trends from 2020 that affected driving costs include:
- Significantly lower fuel prices, which are on pace to finish approximately 17 percent below the national average when compared to 2019
- Slowed depreciation rates – caused in part by vehicle inventory shortages associated with the COVID-19 pandemic production stoppages – that have resulted in increased residual vehicle values
- Rising insurance premiums that, despite reduced travel and accident rates nationwide, are now 29 percent higher than they were a decade ago
They go on to say “to meet their obligations under federal wage and hour laws, employers do not need to reimburse employees at the IRS standard mileage rate,” and to offer some alternative reimbursement approaches.
In general, for small businesses, reimbursing employees at the standard rate is the easiest approach. However, when calculating reimbursements or deductions on a higher-cost vehicle, the actual cost method tends to be more favorable, though it is more work, since all costs (gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation or lease payments) must be tracked. Either way, a mileage log is required. I recommend MileIQ to my clients; or a spreadsheet with the date, number of miles, and business destination/purpose.
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