IRS Announces Higher Standard Mileage Rate for 2018

IRS sets standard mileage rates for business activities of 54.5 cents per mile

By Stephen Miller, CEBS Jan 4, 2018
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Update

In Notice 2018-42, issued on May 25, 2018, the IRS modified Notice 2018-03, which provided the optional 2018 standard mileage rates for taxpayers to use in computing the deductible costs of operating an automobile for business purposes.

Notice 2018-03, in December 2017, identified a standard mileage rate for 2018 of 54.5 cents per mile for all miles of business use (business standard mileage rate) that taxpayers were to use, including to deduct unreimbursed employee travel expenses as a miscellaneous itemized deduction under Section 67 of the tax code.

Notice 2018-42 modifies Notice 2018-03 in light of the Tax Cuts and Jobs Act, signed into law in December 2017. Because the tax legislation suspended the miscellaneous itemized deduction under Section 67 for unreimbursed employee business expenses from 2018 to 2025, the notice explains that the standard mileage rate will not apply to those expenses during that period.

As a May 2018 post from law firm Nexen Pruet explains:

In the past, employees who were not reimbursed for business mileage-related expenses could deduct those expenses from taxable net income. The unreimbursed mileage deduction was allowed along with other "unreimbursed work-related expenses" where all unreimbursed work related expenses in excess of 2 percent of gross income would be deductible. Outside sales employees, for example, who logged significant mileage on their vehicles but did not get reimbursed by their employer could potentially get a deduction for those mileage expenses on their personal taxes. However, the Tax Cuts and Jobs Act in effect for the 2018 tax year eliminated many itemized deductions, including unreimbursed employee business expenses.

Employees affected by this tax change may approach employers about this potential impact on their bottom line and push for a new or revised reimbursement policy to recoup these "tax losses."


The deductible business mileage rate is increasing 1 cent per mile as of Jan. 1, 2018, the IRS announced.

The IRS issues optional standard mileage rates that employers and taxpayers can use to calculate the deduction for operating an automobile for business reasons, as well as for charitable, medical or moving purposes. The new standard mileage rate is the amount a U.S. taxpayer and companies can deduct on a 2018 tax return for recorded business miles in a personal vehicle.

Notice 2018-03, issued on Dec. 14, contains the amount a taxpayer must use in calculating depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Beginning on Jan. 1, 2018, the standard mileage rates for the use of a car (also a van, pickup or panel truck) will be:

  • 54.5 cents for every mile of business travel driven, up 1 cent from the rate for 2017.
  • 18 cents per mile driven for medical or moving purposes, up 1 cent from the rate for 2017.
  • 14 cents per mile driven in service of charitable organizations, unchanged from 2017.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

"Across the U.S., the average costs of owning and operating a vehicle rose just 1 cent over the last reporting period for this cost analysis. All of the ownership and operating costs have been relatively stable, with fuel costs showing the greatest increase, offset by small decreases in vehicle ownership costs," said Donna Koppensteiner-Reidy, senior vice president of business development and marketing at Runzheimer, a business vehicle and relocation-services provider.

"The new rate may be used by taxpayers to compute the maximum deductible costs of operating a passenger vehicle for business purposes, as an alternative to tracking and deducting their actual costs," said Mike Bassi, director of strategic partnerships at Runzheimer. "Many businesses also use this rate to create budgets and to reimburse their employees for reasonable business vehicle costs," he pointed out.

[SHRM members-only HR Q&A: Do we have to reimburse personal auto mileage for business-related trips?]

Limits on Claiming the Deduction

"A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle," the IRS said in a press release. In addition, "the business standard mileage rate cannot be used for more than four vehicles used simultaneously."

These and other requirements are described in Revenue Procedure 2010-51.

Employee Vehicle Reimbursements

Notice 2018-03 also provides the maximum standard automobile cost that may be used in computing the allowance under a Fixed and Variable Rate Allowance (FAVR) plan, in which employees drive their own vehicle and can receive nontaxable reimbursements for their fixed and variable vehicle costs.

"The IRS uses a consistent CPI [consumer price index] formula to calculate vehicle costs in conjunction with the FAVR vehicle value caps and other depreciation limits," Bassi said.

In 2018, for computing the allowance under a FAVR plan, the standard automobile cost may not exceed $ 27,300 for automobiles excluding trucks and vans (down from $27,900 in 2017) or $31,000 for trucks and vans (down from $31,300).

FAVR is the most tax-advantaged program for reimbursing personal vehicle costs, given that employees are reimbursed tax-free, Koppensteiner-Reidy said. But some employers use other methods, such as:

  • A car or vehicle allowance, which is a set amount provided to employees over a given time period to cover the costs of using their own car for business purposes. A car allowance "is the easiest compensation program for employers. However, it's by far the most significant tax burden of all programs," since allowances are taxable to employees unless handled within an "accountable plan" that requires substantiation and the return of excess amounts in a reasonable time.
  • Cost per mile (CPM) is another method for reimbursing employees' car costs, but "CPM programs must meet IRS reporting requirements, and deductions can be less predictable without accurate mileage capture," Koppensteiner-Reidy said.

Vehicle Replacement Costs Rise

New vehicle prices in the U.S. have risen steadily since 2012 and are predicted to continue that trend in 2018, according to Runzheimer's 2018 Vehicle Capital Costs Trend Report, which found that:

  • The overall average price of a new vehicle will increase moderately over the next 12 months by 1 to 2 percent.
  • As inventory in the used vehicle market steadily increases, residual values will decrease over the next 12 months by 2 to 3.5 percent.
  • Depreciation is expected to increase 1 to 1.5 percent..

The increase in vehicle costs is something businesses with fleet programs will need to consider when planning budgets for the coming year, Runzheimer's analysts noted.



Related SHRM Article:

How to Ensure Fair Vehicle Reimbursements for Mobile Employees, SHRM Online Benefits, April 2018

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