The IRS has announced an increase in the standard mileage rate for 2023, which is now 65.5 cents per mile. This is a slight increase of 0.3 cents from the 2022 rate, a move made to counteract inflation and rising fuel costs.
For 2023, the IRS has set the following mileage reimbursement rates:
- For business use, the rate is 65.5 cents per mile, a 3-cent increase from the rate set for the second half of 2022.
- For medical or moving purposes, the rate is 22 cents per mile for qualified active-duty members of the Armed Forces. This rate remains consistent with the increased rate set for the second half of 2022.
- For service of charitable organizations, the rate is 14 cents per mile, which remains unchanged from 2022.
These rates apply to all types of vehicles, including electric and hybrid-electric cars, as well as those powered by gasoline and diesel. The rates are determined based on an annual study of the fixed and variable costs of operating a vehicle.
In 2022, due to high prices, the IRS increased the optional standard mileage rate from July 1 to December 31. This increase was almost double the increase from the beginning of the year, going up by 4 cents for business use, medical care, and for active-duty members of the Armed Forces. This kind of mid-year increase is rare, with the last one happening in 2011 after House Democrats urged the IRS to increase the mileage reimbursement rate.
If you’re a business owner or self-employed and use your vehicle for business, you can deduct car expenses on your tax return. However, if you use your car for both business and personal purposes, you’ll need to divide the expenses. The deduction is based on the portion of mileage used for business.
Actual expenses include depreciation, lease payments, gas and oil, tires, repairs and tune-ups, insurance, and registration fees. If you choose to use the standard mileage rate for a car you own, you must opt for this method in the first year the car is used in your business. If you’re leasing a car and want to use the standard mileage rate, you must use it for the entire lease period.
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 employer for fixed and variable vehicle costs. Fixed costs include items like insurance and tax and registration fees, while variable costs cover expenses like fuel, tires, and routine maintenance and repairs. However, there are some exclusions to this allowance. For instance, in 2022, your vehicle can’t cost 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 fuel costs. Keep in mind that these allowance payments are taxable unless certain measures are taken, so it’s important to understand the tax liabilities for both parties.
Starting from 2018 and continuing through 2025, due to the Tax Cuts and Jobs Act (TCJA), the IRS no longer allows employee business expense deductions related to driving. This means that employees who use their car for work can’t deduct this expense on their tax return, even if their employer doesn’t reimburse them for using their own car. However, there are exceptions for certain groups. Armed Forces reservists, qualified performing artists, and fee-basis state or local government officials can still deduct unreimbursed employee travel expenses.
