Does your business have team members on the road? Pump the brakes on those driving deductions and reimbursements!
As of January 1, 2021, the IRS lowered standard mileage rates by 1.5 cents, largely due to the pandemic and decreased driving costs.
Why does this matter to employers? If you, like many other businesses, use this safe harbor rate to pay tax-free reimbursements to employees who use their own cars for business purposes, you should note these changes. Check out the updates and your other options below.
2021 Mileage Rates
As of January 1, 2021, standard mileage rates for the use of cars, vans, pickups, or panel trucks were updated to:
- 56 cents per mile driven for business use (decreased from 57.5 cents in 2020).
- 16 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces (decreased from 17 cents).
- 14 cents per mile driven in service of charitable organizations (set by statute and unchanged from 2020).
Taxpayers can choose to calculate the actual costs of using their vehicle instead of using the standard mileage rates. However, those who do this must provide adequate records.
The standard mileage rate for employees calculating the actual costs of their cars is 26 cents per mile.
Additional Rules to Note
Only members of the armed forces on active duty can use itemized deductions and deductions for moving expenses. The moving expenses must be related to a permanent change of station.
This is due to a suspension of miscellaneous itemized deductions and deductions for moving expenses in effect through 2025. Employees may not claim a miscellaneous itemized deduction on their tax returns for parking fees and tolls related to their use of a vehicle for business.
Self-employed individuals can still claim a tax deduction for their mileage as a business expense. To do so, they need to:
- Add up their business miles for the year and multiply it by the standard mileage rate.
- Keep a mileage log or use a mileage-tracking app like Microsoft’s MileIQ.
How to Use FAVR Plans
Employers can choose to use Fixed and Variable Rate (FAVR) allowance plans instead of the IRS mileage rates. Through an FAVR plan, you would provide employees with tax-free reimbursements for:
- Fixed vehicle costs (e.g., insurance, taxes, and registration fees)
- Variable vehicle expenses (e.g., fuel, tires, regular maintenance, and repairs)
As with all things, the IRS sets a maximum amount that the cost of a vehicle under a FAVR plan cannot exceed. For 2021, the cost of automobiles, trucks, and vans may not exceed $51,100.
Employers may only provide a FAVR allowance to an employee who can provide adequate records showing:
- At least 5,000 miles driven in a calendar year while performing employee duties, OR
- If greater, 80% of the annual business mileage of that FAVR allowance.
For employees covered by the FAVR allowance for less than the entire calendar year, the employer may prorate these limits on a monthly basis.
So, is a FAVR the way to go? Consider this to determine if it’s right for your business and employees:
- Pro: The FAVR allowance may be more than the standard mileage rate in locations with higher vehicle operating costs.
- Con: The employer must recalculate the FAVR allowance at least once every three months because they must pay employees at least quarterly.
Flat Vehicle Allowance
Some employers choose to reimburse employees for using their own cars for business-related driving with a flat car allowance. For example, a company might provide a worker $400 per month to cover things like fuel, wear and tear, tires, and more. A business with employees in different regions can pay these allowances using a variable rate for different locations.
Is a flat car allowance best for your business?
- Pro: It is fairly easy to manage and pay out.
- Con: Payments are taxable to employees unless employees can provide adequate records of their driving and vehicle expenses. They also need to return excess amounts to the employer in a reasonable time.
Whether you need help understanding the IRS mileage rates and rules or determining which method makes the most sense for your company, BlueLion can help. Contact us today at 603-818-4131 or firstname.lastname@example.org to learn more.
The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.