What the IRS Mileage Rate Doesn’t Cover—And Why That Matters

Most businesses with a mobile workforce using their personal vehicles for work-related travel are familiar with the Internal Revenue Service’s standard mileage rate. The rate, set annually by the IRS, factors in average national costs of owning and operating a vehicle to produce a figure that businesses can use for mileage reimbursement. 

Many may assume that this optional IRS rate accounts for all costs associated with owning and operating a vehicle; however, this isn’t the case! Understanding what the standard mileage rate covers—and what it doesn’t—is essential for ensuring accurate budgeting and well-managed reimbursement processes.

First of All…What Does the Rate Cover?

Let’s start by establishing what vehicle-associated costs do fall under the umbrella of the standard mileage rate. As CompanyMileage found in a study, the mileage rate is calculated every year to approximate the cost of fuel, maintenance, insurance, and depreciation over time in the United States. 

Because this rate uses national averages, it does not account for regional differences in vehicle-specific costs, or varying fuel prices. The IRS rate also, for the sake of simplicity, assumes average operating conditions, not factoring in unique usage patterns or specialty vehicles. 

So, What’s Not Covered?

This leads us directly into the factors that don’t fall under the coverage of the standard mileage rate. For one thing, the rate doesn’t consider costs of parking and tolls; if your employees have to pay these costs often in the course of business use of their vehicle, your organization may have to reimburse these separately.

High insurance premiums also fall outside of the IRS’s mileage rate calculations. The standard rate’s use of national averages can’t account for the fact that certain regions—and certain drivers—will have much higher premiums than others. Likewise, while depreciation is factored into mileage rate calculations, vehicle financing costs, such as loan interests and lease payments, are not. 

There are also certain vehicle expenses that, while they may be necessary for some mobile workers, didn’t fall under the considerations of the IRS. These include equipment upgrades, such as tire chains, snow tires, and custom equipment, and vehicle expenses for things like detailing and cleaning costs.

The Vehicle Type Matters, Too

The IRS standard mileage rate is calculated using the cost of operating a standard personal vehicle. Picture a mid-sized sedan, for example, or a light SUV. The rate isn’t tailored for vehicles that fall outside that category. Employees with vehicles with more expensive upkeep, like trucks, large SUVs, and luxury vehicles, will incur higher costs from maintenance, fuel and insurance than what the rate reflects. 

Conversely, some common cars cost less to operate per mile than the amount reimbursed by the standard rate, such as electric vehicles and fuel-efficient hybrids. This also applies to compact cars, which have comparatively lower fuel, tire, and maintenance costs. 

How These Gaps Impact Businesses and Employees

So some vehicle costs aren’t covered by the IRS standard mileage rate. That’s to be expected, right? After all, not even the IRS is omniscient. That being said, it’s important to keep these outside factors in mind when considering your business’s mileage reimbursement practices. Organizations that rely solely on the mileage rate are likely to underestimate the actual costs of employee travel, leading to ineffective reimbursement.

Some employees, for example, could actually lose money being reimbursed at the IRS rate if their actual vehicle costs are significantly higher. Failing to account for this could result in a hit in employee morale when it comes time to issue reimbursement payments. 

Compliance may suffer as well, since employees who don’t feel that they’re being reimbursed fairly are less likely to act in strict accordance with company regulations. On a long enough timeline, inconsistent reporting stemming from ineffectual reimbursement may even impact auditing processes. 

On the other hand, the IRS rate could actually be too high for a company in some cases. If your employees drive more fuel efficient vehicles or you live in a state with lower insurance premiums, you may find that your employees can be fairly reimbursed at a lower rate. 

What Can Your Organization Do? 

To steer clear of these pitfalls, your business needs to carefully consider what your rate of reimbursement should be, rather than relying solely on the IRS rate. If vehicle costs in your area are lower than the national average, the rate should be lower. If expenses are higher, you might need to reimburse more than the standard rate—but be careful, as excess payments are taxable. Keep in mind that some states legally require employers to reimburse employees at the IRS mileage rate, so be sure to check your state’s labor laws before setting your policy.

Consider CompanyMileage

CompanyMileage and its suite of intuitive, easy-to-use software solutions are designed to streamline and simplify the mileage reimbursement process. By using automated processes to track and calculate mileage totals, our mileage reimbursement software, SureMileage, along with our mobile app, SureMobile, eliminates the chance for duplicated reports, personal trips, and inflated mileage totals to make their way into expense reports. 

Our commitment to helping our clients achieve the best reimbursements possible even extends to finding the mileage rate itself. With our free rate calculator, you can find a more regionally-specific estimated mileage rate using gas prices in your business’s area. 

Contact CompanyMileage for a demo today to find out more about how we can help your company optimize mileage reimbursement—and even save you money in the process!