The IRS standard mileage rate is usually announced in December for the upcoming tax year, and the number they land on has a huge impact on the amount your business pays in mileage expense reimbursements. In rare circumstances, though, the IRS will make a mid-year adjustment to the standard mileage rate so that it better reflects current economic conditions. This is precisely what happened in 2022 when the IRS opted to increase the rate from 58.5 cents per mile to 62.5 cents per mile for the second half of the year.
As we enter the home stretch of 2022, you wouldn’t be alone in wondering if 2023 is going to be a continuation of the financial rollercoaster this year has been. Will the standard mileage rate remain high or drop back down to a number we’re more used to seeing? Should you expect another mid-year adjustment next year as macroeconomic trends remain uncertain? How should you be preparing your budget for next year? We help you answer these questions!
What Influences The Standard Mileage Rate?
Each year, the IRS analyzes how much it costs to own and operate a car in the US to calculate the standard mileage rate. A common misconception about the mileage rate is that it’s directly tied to gas prices. While the cost of gas is certainly a factor, a CompanyMileage analysis of what it really costs to own and operate a car found that fuel prices only account for 30% of the overall cost. Depreciation actually makes up the largest portion of vehicle ownership costs, accounting for 45%. Other costs include insurance (12%), licenses, registration and taxes (7%), and tires (3%) and maintenance (3%).
Factors Affecting the Standard Mileage Rate in 2023
While gasoline prices are not the only factor considered, the IRS rate does tend to mirror fuel price trends to some extent. If gas prices are expected to remain low in the upcoming year, the IRS is more likely to announce a lower rate. If gas prices are high and are expected to remain so well into the upcoming year, the IRS rate tends to be higher. Of course, we’ve all seen firsthand in 2022 how volatile gas prices can be, and they’re especially susceptible to events that can be hard to predict, such as armed conflicts. Still, since fuel costs account for 30% of car ownership costs, we have to do our best to account for their impact.
At the end of 2021, the US Energy Information Administration (EIA) expected gas prices to hover around $2.74/gallon in 2022. Fast forward a year later to now, and the EIA anticipates the 2022 average to come out around $4.02 when all is said and done. Fortunately, gas prices are forecasted to fall modestly next year, with the 2023 average expected to be $3.61—still high, but hopefully not anywhere close to the $5 prices we saw over the summer.
Besides the cost of fuel, there are many other costs that come along with car ownership, and each year, AAA releases their Your Driving Costs report in which they break down the average costs of owning and operating a new vehicle. In 2022, the average yearly cost rose to $10,728, or $894 per month compared to 2021 in which AAA estimated the average yearly cost was $9,666 or $805.50 per month. Below you can see how AAA breaks down costs into six different categories, all of which have increased over the last year.
- Depreciation: $3,900 a year ($3,656 in 2021).
- Finance: $712 a year ($658 in 2021).
- Fuel: 17.99 cents per mile (10.72 cents per mile in 2021).
- Insurance: $1,588 a year ($1,342 in 2021).
- License, registration and taxes: $675 a year ($669 in 2021).
- Maintenance, repair and tires: 9.68 cents per mile (9.55 cents per mile in 2021)
In addition to increased fuel expenses, you may (or may not) be surprised to see that the average cost of insurance has also risen. Unfortunately, that’s a trend that’s expected to continue into 2023. In a recent report, Insurify estimated the average yearly auto premium in 2022 to hit $1,648. By 2023, they predict drivers could pay an average of $1,846. This increase is due to the uptick in the number of accidents and dangerous driving habits we’ve seen since the pandemic began, an increase in the cost of vehicle repair and replacement, and a rise in car prices overall.
If it isn’t obvious already, everything seems to cost more in 2022 compared to 2021, but is this a trend that is going to continue? Thankfully, while inflation rates shot up in 2022, they are expected to decrease a bit heading into 2023. According to JPMorgan, the Consumer Price Index is expected to ease to a year-over-year pace of 3.2% by September 2023, down significantly from the 8.2% high seen in September.
What’s the Verdict?
When all of these cost factors are weighed against each other, we believe it is likely that the IRS standard mileage rate will drop from its current high of 62.5 cents per mile, but we don’t expect a drastic decrease. As your company prepares its 2023 budget, you should expect the IRS rate to fall three to five cents, landing somewhere around 58 cents per mile. As gas prices react to events happening halfway around the world, you can use our mileage rate calculator to help you determine what an appropriate rate should be for employees based on gas prices in your area. Find CompanyMileage’s rate calculator here.
Control Employee Mileage Reimbursement Costs
With 2023 on the horizon, it’s wise to start preparing for employee mileage reimbursement expenses accordingly. CompanyMileage helps companies keep these costs from getting out of hand. Our mileage and expense reimbursement software, SureMileage, enables you to eliminate costs associated with inaccurate expense reporting.
Rather than tracking the miles employees drive and then verifying them after the fact, SureMileage calculates the mileage between the beginning and ending points of each trip. This method eliminates the potential for detours, non-work related errands and inflated mileage estimates from winding up in their trip logs.
No matter what the IRS standard mileage rate is in 2023, you want to be ready with expense reimbursement software that helps your company save money. Join the thousands of CompanyMileage customers who have saved up to 30% on reimbursement expenses today. Request a demo to learn more.