Effective Jan. 1, 2020, the optional standard mileage rate used in deducting the costs of operating an automobile for business is 57.5 cents per mile, down one-half cent from 2019, the IRS announced Dec. 31 in Notice 2020-05. This is the first time the rate has fallen in three years.
Businesses can use this amount—also called the safe harbor rate—to pay tax-free reimbursements to employees who use their own vehicles for business.
"The IRS business mileage standard is a go-to reimbursement method for many businesses and individuals," said Craig Powell, CEO of Motus, which makes software that helps companies manage mobile workers. The standard rate offers "a tax-free threshold that U.S. employers can reimburse up to without incurring taxes or defensibly demonstrating the business expense above the safe harbor rate."
Under-reimbursements may result in lawsuits brought by mobile workers claiming their employers failed to cover their out-of-pocket costs for business-related driving, according to Motus.
For 2020, standard mileage rates for the use of cars, vans, pickups or panel trucks will be:
- 57.5 cents per mile driven for business use, down from 58 cents in 2019.
- 17 cents per mile driven for medical or moving purposes, down from 20 cents.
- 14 cents per mile driven in service of charitable organizations, which is unchanged.
Notice 2020-05 also notes that, for cars an employee uses for business, the portion of the standard mileage rate treated as depreciation will be 27 cents per mile for 2020, up from 26 cents per mile in 2019.
While the standard mileage rates for business, medical and moving purposes are based on annual changes in the costs of operating an automobile, the charitable rate is set by statute.
According to Motus, which supplies the IRS with data on business vehicle use, significant trends factoring into the 2020 rate decrease were lower national average fuel prices and better fuel economy in new vehicles, although these savings were partially offset by factors such as slightly higher insurance prices due to costly repairs to more-expensive vehicle technology and increased labor costs.
"Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates," the IRS explained. They will need to document their mileage adequately, the agency said.
Since the standard rate "doesn't account for driving costs that fluctuate based on geography and time of year, businesses using the rate to reimburse mid- and high-mileage workers are likely to give reimbursements that do not reflect actual driving costs," Powell said. "By treating all employees' expenses as the same regardless of location or individual situations, reimbursement using the IRS rate creates winners and losers by over- or under-reimbursing them for their costs."
[SHRM members-only HR Q&A: Do we have to reimburse personal auto mileage for business-related trips?]
On Nov. 14, the IRS issued Revenue Procedure 2019-46, which updated standard mileage rules to reflect provisions of the Tax Cuts and Jobs Act (TCJA) that took effect in 2018. The TCJA suspended miscellaneous itemized deductions and deductions for moving expenses except for members of the armed forces on active duty whose expenses are related to a permanent change of station. The suspension is effective for tax years 2018 through 2025.
The revenue procedure clarifies that during the suspension period, employees may not claim a miscellaneous itemized deduction on their tax returns for parking fees and tolls attributable to their use of an automobile for business.
For businesses that choose not to use the standard mileage rates, Notice 2020-05 sets maximum vehicle expenses under a Fixed and Variable Rate (FAVR) allowance plan, in which employees who drive their own vehicles can receive tax-free reimbursements from their employers for fixed vehicle costs (such as insurance, taxes and registration fees) and variable vehicle expenses (such as fuel, tires, and routine maintenance and repairs).
Under a FAVR plan, the cost of the vehicle may not exceed a maximum amount set by the IRS each year. For 2020, vehicle costs may not exceed $50,400 for automobiles, trucks and vans, unchanged from 2019.
An advantage of using a FAVR plan to reimburse employees is that "in locations with higher automobile operating costs, the FAVR allowance may be more than the standard mileage rate," according to payroll, benefits and compliance firm Justworks. "The disadvantage is that the employer must recalculate the FAVR allowance at least once every three months," as payments to employees must be made at least quarterly.
Revenue Procedure 2019-46 stated that an employer may give a FAVR allowance only to an employee who can produce adequate records showing at least 5,000 miles driven during the calendar year in performing services as an employee or, if greater, 80 percent of the employer's estimate of annual business mileage used in calculating the FAVR allowance.
If the employee is covered by the FAVR allowance for less than the entire calendar year, the employer may prorate these limits on a monthly basis.
The FAVR method was designed to more accurately and fairly reimburse employees, with tax-free payments, for the exact cost of driving for work, Powell said. "When mobile workers drive a high number of business miles through the year, alternate methodologies like FAVR can save hundreds or thousands of dollars for organizations and their drivers alike."
Motus calculates that organizations have saved more than $1 billion using FAVR reimbursement compared to the IRS business mileage standard since 2007. "Business leaders should be especially motivated to understand reimbursement options" and how they affect business costs, Powell advised.
Flat Car Allowances
Another way for employers to reimburse employees for their business-driving expenses is a flat car allowance, which is a set amount paid to employees over a given period to cover the costs of using their own car for business purposes—such as $400 per month for the cost of fuel, wear and tear, tires and more. Employers can also pay expenses using a variable rate for different locations.
While a car allowance is relatively easy to administer, payments are taxable to employees unless handled within an "accountable plan" that requires substantiation through adequate records and the return of excess amounts in a reasonable time.
Choosing the Best Method to Reimburse Drivers
Although using the business mileage rate set by the IRS can be an easy way to calculate the deduction for operating a personal vehicle for business, "it may not be the best method for an organization to achieve cost savings, risk reduction and a happier mobile workforce," said Motus CEO Craig Powell.
When deciding on a reimbursement method, companies should evaluate their business needs, such as the number of business miles driven during the year, Powell explained. For instance:
- Low-mileage drivers (with fewer than 5,000 business miles per year) who drive for work occasionally but aren't using their vehicles every day for business trips are prime candidates for the IRS business mileage rate. To file their mileage claims, employees need to use an IRS-compliant mileage log but they don't need to submit further documentation—and mileage reimbursements can be paid 100 percent tax-free.
- Mid-mileage drivers (with 5,000 to 20,000 business miles per year) and their employers may benefit from more-sophisticated IRS reimbursement practices—such as FAVR plans that take into account variable driving costs—to more accurately and fairly reimburse employees for the exact cost of driving for work, thereby taking full advantage of tax-free reimbursements.
- High-mileage workers (with 20,000 or more business miles per year) are well suited for companies to use FAVR plans or to offer a fleet vehicle program where employers provide the vehicles and then charge employees for their personal use of that vehicle.
Related SHRM Article:
How to Ensure Fair Vehicle Reimbursements for Mobile Employees, SHRM Online, April 2018