The IRS announces a new mileage rate for 2023
What is the 2023 IRS standard mileage rate?
The IRS has announced that the standard optional mileage rate for 2023 is 65.5 cents per mile. This is an increase of 3 cents over last year's rate. The rate is now higher than it has been in the last 11 years.
Additionally, active duty Armed Service members can claim moving and medical driving expenses at 22 cents per mile. This is the same as it has been since midyear 2022.
Thirdly, charitable driving expenses can be deducted at 14 cents per mile. This rate is also unchanged.
The maximum standard vehicle price has also increased with this announcement. The new figure is $60,800, an increase of $4,700 over last year.
What is the IRS standard mileage rate?
The IRS standard mileage rate is an optional cents per mile, tax deductible rate, reimbursable for every mile of business driving. Any motor vehicle work-related expenses are meant to be covered by the IRS standard mileage rate. It is a tax-free average rate that employers and freelancers can use to make business driving deductible.
The IRS rate is an optional maximum
You do not have to pay the IRS standard mileage rate to yourself or to your drivers. You can also pay any figure up to the IRS rate tax free. For example, you can pay $0.50 per mile, $0.30 per mile, etc.—these rates, lower than $0.655, are also tax-free. However, if you exceed the IRS standard rate as a reimbursement figure—say, for example, you pay $0.70 per mile—the difference between the IRS standard rate and the actual cents per mile reimbursement figure is taxed.
So in this case where you paid $0.70 per mile, payroll and income tax would need to be deducted on 4.5¢ cents per mile.
The IRS rate is a benchmark for accountable allowances
The IRS standard rate can also be used for calculating tax-free and taxable amounts of your car allowances. When you offer a car allowance—for example, of $600 per month, to your employees who drive their personal vehicle for work—you can use the IRS rate to figure out how much tax you need to deduct from this figure.
Let's say you pay an allowance of $600 per month All you have to do to figure out how much tax to deduct is to divide that allowance by the number of miles an employee drove in a month and then compare that figure to the cents per mile IRS rate. So if they drove 1000 miles in a month, then they would have received $0.60 per mile.
This is under the IRS mileage rate of 65.5¢, so no tax need be deducted from the allowance; however, if your employee only drove 500 miles one month and you still paid them their $600 allowance, they would have received $1.20 per mile. Then, you would need to deduct tax from the delta. So 54.5¢ cents need to be taxed at the relevant payroll and income tax rates.
New standard vehicle cost
The IRS has also released a new maximum vehicle cost for actual expense mileage reimbursement accounting purposes. That figure is $60,800.
What is the standard vehicle cost?
The maximum standard vehicle cost is used in reimbursement programs like FAVR in order to determine the cost of vehicle expenses like depreciation, insurance, fuel (miles per gallon) etc. If you use an actual cost method for reimbursing vehicle expenses you need to know the original MSRP of the vehicle. And this IRS guidance sets the maximum MSRP of a vehicle that can be reimbursed tax-free.
So if you have a vehicle whose cost is equal to or less than $60,800 then all reimbursements made under an actual costs method on that vehicle should be tax-free. This applies even if your actual vehicle expenses exceed the IRS rate: FAVR is the only reimbursement methodology that allows you to exceed the IRS standard mileage rate of 65.5 cents, tax-free.
One vehicle type for your reimbursement program
There is also a second consequence of this number for companies with FAVR programs, and that is when you set a program standard vehicle, because you can set a program standard vehicle (or a vehicle type) for your workforce. That is, you can assign a certain vehicle type to your whole workforce, which is not the actual car that they drive, but rather is a virtual car, on which their reimbursements are based. You can choose a car, as their employer, that you deem reasonable for the job.
And the maximum value of this vehicle type is $60,800 as well. Then, according to IRS rules for mileage reimbursement, they have to drive an actual car that costs at least 90% of that figure. So if your program standard vehicle costs $50,000, they have to buy a car that costs at least $45,000, when new.
But no matter which reimbursement methodology you use, the most expensive car that you can reimburse for tax-free costs $60,800. If you are paying a cents per mile reimbursement, if you are using the IRS standard mileage rate of 65.5 cents per mile, you don't need to worry about this number. The IRS standard rate doesn't care what car you drive. It only cares for how many miles you drive.
Who uses the IRS standard mileage rate?
Everybody who drives for work can use the IRS standard mileage rate to reimburse themselves or their employees for business driving. If you are a small business owner, a contractor, an Uber, Lyft, or DoorDash rideshare or food delivery driver, a freelancer, you can deduct your miles times the optional IRS rate to get a tax-free reimbursement and not pay any tax on your business related driving.
Businesses can also pay their employees a cents per mile reimbursement of any value up to and including the optional rate. These programs are called cents per mile programs, and they are a simple and effective tax free program that businesses can use to reimburse their mobile workforce who drive their personal vehicles for work These programs are not for fleets of company owned or leased vehicles, but rather for employee-owned fleets.
The IRS rate is updated every year, and this year it is 65.5 cents per mile. At the same time as the IRS updates their mileage rate, they also update their maximum reimbursable vehicle cost, and this year it is $60,800.
The IRS rate is more than just a simple rate that lets the self-employed claim mileage deductions, and businesses reimburse their employees tax-free. It is also a benchmark that companies can use to reimburse with accountable allowances. The IRS rate is an indispensable tool for businesses and individuals alike.
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