Reimbursement rates for business mileage should be determined based on the average costs to own and operate a vehicle. For instance, to determine the appropriate standard mileage rate, the IRS annually conducts a study analyzing these costs. Factors considered in figuring the rate include insurance, license and registration fees, taxes, tires, maintenance, fuel, and vehicle depreciation.
With inflation a persistent problem in today’s economy, these costs have likely increased, but by how much? And more importantly, is the reimbursement rate you’re using still the best rate for your employees?
Since peak inflation in June 2022, inflation rates in the US have gradually slowed. However, July 2023’s reported inflation rate ticked up slightly to 3.2%, up from June’s 3% rate. Despite overall declining rates over the past twelve months, inflation is still front-of-mind for many operating in today’s economic landscape.
When it comes to calculating the mileage reimbursement rate, here’s how inflation might affect vehicle costs.
1. Fuel Prices
The cost of fuel is a not-insignificant factor in calculating an accurate standard mileage rate. And gas prices themselves are impacted by a number of factors, from holidays to weather to, of course, what the economy is doing, and higher inflation rates tend to mean higher fuel prices.
In summer of 2022, gasoline prices hit an all-time high due to inflation, landing at over $5 per gallon. After that peak, prices started to drop again, remaining relatively steady on average across the US in 2023. However, in the last week of July prices started to go up again, to an average of $3.71.
2. Car Costs
When inflation rates started to balloon, the Federal Reserve worked to temper this rise by raising interest rates for purchasing vehicles, used and new. As of July 2023, the Fed had set the benchmark rate at 5.5, up from 5.25 in June. In May of 2023, the average car buyer in the United States paid $48,528, a rise of about $1400 from average car costs last year. In July, used car prices declined 1.3%, giving prospective buyers a glimmer of hope.
While vehicle depreciation (which accounts for 45% of the overall cost of owning and operating a vehicle) is not occurring as quickly, the cost of purchasing a new (or used) vehicle is much higher. Therefore, car owners are less likely to trade in their older model for a new one, opting instead to repair and maintain the car they already have (a decision that comes with its own costs).
3. Maintenance Costs
Economic inflation has had a staggering effect on the cost of vehicle maintenance. In July of 2022, the Department of Labor reported that the costs of motor vehicle parts and equipment were up 14.7% across the United States. Additionally, from 2022 to 2023, the price of motor vehicle repairs rose 23%, due to a shortage of both car parts and workers. This rate of inflation is almost four times higher than that of overall price increases.
4. Auto Insurance
Because costs of both replacing and repairing vehicles have gone up, claims have become more frequent and more expensive. In turn, insurance companies raise their rates in an attempt to compensate.
The United States Bureau of Labor Statistics reported in July of 2023 that auto insurance rates have increased 17.1% in the last year. In 2023, full coverage car insurance costs were at an average of $2,014, or about 2.93% of the national average annual income of just under $69,000.
Is the IRS Standard Mileage Rate Still Accurate?
While it’s difficult to know precisely if the IRS rate is still on point without knowing the specifics of their methodology, it’s safe to assume that the IRS anticipated the increases in vehicle ownership costs when they landed on the 2023 rate of 65.5 cents. In fact, this year’s rate is 3 cents higher than the rate set for the second half of 2022 and 7 cents higher than the rate set for the first half of 2022.
Keep Up With CompanyMileage
With so many vehicle-related costs either on the rise or remaining high, businesses must manage their employee mileage reimbursement expenses accordingly. CompanyMileage and its suite of software solutions works to make mileage reimbursement as easy, efficient and cost-effective as possible.
Instead of making employees or supervisors attempt to calculate and verify miles driven, our software, SureMileage, uses starting and ending points of each trip to calculate mileage. The app then calculates the expenses to be reimbursed. This calculation is based on either the IRS standard mileage reimbursement rate, or any other mileage rate your business has chosen to use (perhaps determined by using CompanyMileage’s rate calculator). This method, known as point-to-point calculation, eliminates the possibility for inflated mileage estimates, detours, or non-work-related travel to show up in employees’ mileage logs.
However inflation rates affect your mileage reimbursement process, CompanyMileage is here to help you meet the challenge. Contact us today to learn how our solutions help our customers save up to 30% on mileage reimbursement costs.