Effective Jan. 1, 2021, the optional standard mileage rate used in deducting the costs of operating an automobile for business will be 56 cents per mile, down 1.5 cents from 2020, the IRS announced Dec. 22 in Notice 2021-02.
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.
“It isn’t a big surprise that the IRS business mileage standard dropped to 56 cents per mile,” said Ken Robinson, market research manager at Motus, a mobile workforce management software firm. ”Overall driving costs are significantly lower than they have been in previous years as a result of the COVID-19 pandemic. National fuel prices are on pace to finish approximately 17 percent below the national average when compared to 2019 due to decreased travel and an oversupply of crude oil. Depreciation rates have also slowed, which was caused in part by vehicle inventory shortages associated with the pandemic production stoppages and has led to increased residual vehicle value.”
Changes for 2021
For 2021, standard mileage rates for the use of cars, vans, pickups or panel trucks will be:
- 56 cents per mile driven for business use, down from 57.5 cents in 2020.
- 16 cents per mile driven for medical or moving purposes, down from 17 cents.
- 14 cents per mile driven in service of charitable organizations, which remains unchanged.
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.
“Taxpayers always have the option of calculating theactual costs of using their vehicle rather than using the standard mileage rates” by providing adequate records, the IRS explained.
Notice 2021-02 also provides that, for cars an employee uses for business, the portion of the standard mileage rate treated as depreciation will be 26 cents per mile for 2021, down from 27 cents per mile in 2020.
[SHRM members-only HR Q&A: Do we have to reimburse personal auto mileage for business-related trips?]
In November 2019, 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.
Unlike W-2 employees, “the self-employed can [still] claim a tax deduction for their mileage as a business expense,” said Marin Perez, senior content marketing manager for Microsoft’s MileIQ app. They can do so by adding up their business miles for the year “and then multiplying that by the standard mileage rate,” Perez said. The IRS requires those who are self-employed to keep a mileage log or use a mileage-tracking app if they deduct their business miles, he noted.
Businesses have the option of calculating the actual costs to employees rather than using standard mileage rates, and Notice 2021-02 provides maximum vehicle expenses when using 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 2021, vehicle costs may not exceed $51,100 for automobiles, trucks and vans, up from $50,400 in 2020.
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 provide a FAVR allowance only to an employee who can provide 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 annual business mileage of that 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.
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 provided 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.
“The COVID-19 pandemic forced business leaders to re-evaluate their economic decision making,” said Motus CEO Craig Powell. “As part of this, identifying accurate reimbursement methodologies has become a priority for companies with mobile employees. Organizations regularly relied on the IRS business mileage standard for years prior to the pandemic and some will still use it in the future, but many have now discovered the amount of wasted spend and corporate liability associated with flat reimbursement. They’re coming to understand that by using personalized methodologies, such as FAVR, businesses and their drivers can experience hundreds or thousands of dollars of savings, while also remaining compliant with federal and state labor laws.”