Cents-per-Mile Mileage Reimbursement
WHEN TO USE THE STANDARD MILEAGE RATE
The IRS Standard Rate is commonly utilized by businesses for reimbursement of occasional business mileage. The model revolves around a Cents-per-Mile reimbursement that is typically determined once per year.
When used as a primary method of reimbursement for regular business driving, the Cents-per-Mile rate does not respond as expected. It does not adjust to, or account for the following:
- Fuel – Prices fluctuate daily, and the standard rate lags the marketplace by one year
- Region – Insurance and taxes are very different from one jurisdiction to another
- Driver Behavior – At low mileages the standard rate will underpay drivers, and at higher mileages overpay
When the Cents-per-Mile rate is used for daily business travel, it is commonly referred to as “driving for dollars”. It may not be an efficient use of an employee’s time to travel a few hours and many miles out of town but, it can make up a month-end cash flow shortfall.
Take a look at two drivers whose travel expenses are covered under the IRS Standard Rate reimbursement; one in Boston and the other in Los Angeles. Even though their costs are significantly different they each get the same reimbursement, the same Cents-per-Mile. Furthermore the costs of purchasing, registering, and insuring a vehicle need to be paid in full regardless of the number of miles driven. This means either the driver or their employer are paying for the inaccuracy of the Standard Rate. Using a rate of 56 Cents-per-Mile, the driver in Boston would receive $3,360 for driving 6,000 miles, while the driver in Los Angeles would get a $25,200 reimbursement for a 45,000 mile year. Neither amount is close to their actual costs.
The benefits of the IRS Standard Rate model are seen in occasional business driving, reimbursing employees whose job description does not require a car. Across an expansive fleet or heavily mobile workforce, inaccuracies compound and can result in corporate loss or employee turnover. If your business involves employees who drive regularly, then an IRS compliant Accountable Plan 463 or Fixed & Variable Rate Plan may be the better solution.