Overview of Mileage Reimbursement for Businesses: Understanding What Companies Pay

The Internal Revenue Service (IRS) has updated the optional standard mileage rates for the year 2018. These rates are designed to help individuals and businesses calculate the deductible costs of operating an automobile for various purposes, including business, charitable, medical, or moving.

2018 Standard Mileage Rates

Starting from January 1, 2018, the standard mileage rates for car use will be as follows:

Business travel: 54.5 cents per mile, up by 1 cent from the 2017 rate. Medical or moving expenses: 18 cents per mile, also up by 1 cent from the 2017 rate. Service of charitable organizations: 14 cents per mile (unchanged from the 2017 rate).

The business rate and the medical and moving expense rates have each increased by 1 cent per mile from the 2017 rates. The charitable rate is set by statute and remains unchanged.

Standard Mileage Rate for Business

The business mileage rate is based on an annual study of the fixed and variable costs of operating an automobile, aiming to provide a fair and reasonable compensation for the use of personal vehicles in a business context. These costs typically include depreciation, fuel, and maintenance.

Variables in Mileage Reimbursement

The exact amount a company pays for mileage reimbursement varies depending on several factors:

Car type and fuel efficiency: Higher efficiency can impact the total costs and, consequently, the reimbursement rate. For example, a Mercedes E class estate with 50 MPG might receive a reimbursement of 45 pence per mile in the UK. Company position and individual circumstances: Higher-level executives or different areas of the company might receive different rates. Annual mileage: Higher mileage might warrant a review or increase in the reimbursement amount. Location: The cost of living in different regions can affect the amount of reimbursement.

Roughly 50% of the expense of a new car over a three-year period is depreciation, 25% is fuel, and 25% is service and repairs. This breakdown helps companies to estimate and budget for their mileage reimbursement programs accurately.

Use of Standard Mileage Rates

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. However, there are certain conditions under which the standard mileage rate may not be applicable:

Depreciation: A taxpayer cannot use the business standard mileage rate for a vehicle after using the Modified Accelerated Cost Recovery System (MACRS) or claiming a Section 179 deduction for that vehicle. Multi-vehicle limitation: The business standard mileage rate cannot be used for more than four vehicles used simultaneously. Specific requirements: Detailed requirements are described in Rev. Proc. 2010-51.

Note: The document Notice 2018-03 available on an official U.S. government website provides the standard mileage rates and additional details required for calculations.

Conclusion

The standard mileage rates for business purposes are an important tool for companies to manage their expenses and ensure compliance with tax regulations. Understanding the factors that influence these rates can help businesses optimize their mileage reimbursement programs effectively.