The release of the 2023 standard mileage rate from the IRS reveals the rate is going up. The new standard mileage rate for 2023 is 65.5 cents per mile.
That is a 0.3-cent increase from the 2022 standard mileage rate adjustment the IRS announced earlier this year as a means of combatting inflation and higher gasoline costs.
2022 IRS Mileage Reimbursement Rate
For 2023 the IRS mileage reimbursement rates for businesses, individuals, and other organizations are as follows:
- 65.5 cents per mile driven for business use, up 3 cents from the midyear increase setting the rate for the second half of 2022.
- 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, consistent with the increased midyear rate set for the second half of 2022.
- 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2022
The IRS goes on to say this increase applies to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.
An annual study of the fixed and variable costs of operating an automobile is used to set the standard mileage rate for business use.
The Mid-Year Increase in 2022
Because of the high prices in early and mid-2022, the IRS increased the optional standard mileage rate from July 1, 2022, to December 31, 2022. The increase which was considerably high was almost double the increase from the beginning of the year. It went up by 4 cents for business use and medical care as well as for members of active-duty members of the Armed Forces. The IRS rarely makes a mid-year increase, with the last one taking place in 2011. This took place after House Democrats called on the Internal Revenue Service (IRS) to increase the mileage reimbursement rate.
So, Who Can Deduct Car Expenses on Their Tax Returns?
If you own a business or are self-employed and use your vehicle for business, you may deduct car expenses on your tax return. On the other hand, if you as a taxpayer use your car for both business and personal purposes, you will have to split the expenses. The deduction is based on the portion of mileage used for business.
This is how you figure out car expenses, actual expenses and using the standard mileage rate:
Actual expenses include:
- Lease payments
- Gas and oil
- Repairs and tune-ups
- Registration fees
Using the Standard Mileage Rate
If you are going to use the standard mileage rate for a car you own, you must choose to use this method in the first year the car is available for use in your business. Then again if you want to use the standard mileage rate for a car you are leasing, you must use it for the entire lease period.
Alternative Vehicle Allowances and Reimbursements
If you drive your own car, you can also use the Fixed and Variable Rate (FAVR) allowance plan to receive tax-free reimbursements from your employee for fixed and variable vehicle costs. Fixed costs are items such as insurance and tax and registration fees. Variable costs are expenses such as fuel, tires, and routine maintenance and repairs.
There are some exclusions to this allowance. Your car can’t cost more than what the IRS sets as the maximum for each year. For example, for 2022 your vehicle can be more than $56,100 for automobiles trucks and vans.
Flat car allowances are another way employers can reimburse their employees for business driving expenses. This is a set amount an employer can provide to their employees to cover the costs of using their own vehicle for business purposes over a given period.
The amount can vary by location, task, and type of vehicle. However, both parties can agree on a set amount such as $750 for wear and tear, tires and of course cost of fuel. Remember these allowance payments are taxable unless some measures are taken. So, make sure to find out what the tax liabilities are for both parties.
No More Tax Deduction for Employees
Related to driving, the IRS no longer takes employee business expense deductions. This started in 2018 and it will go through 2025 because of the Tax Cuts and Jobs Act (TCJA). According to the IRS, “Employees who use their car for work can no longer take an employee business expense deduction as part of their miscellaneous itemized deductions reported on Schedule A.”
The agency goes on to say employees can’t deduct this even if their employer doesn’t reimburse the employee for using their own car. However, there is an exception for a certain group. Armed Forces reservists, qualified performing artists, and fee-basis state or local government officials may still deduct unreimbursed employee travel expenses.
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