Is the IRS-Standard Mileage Rate Too Expensive?
Companies are looking for alternatives with the 2023 IRS standard mileage rate for business use increasing to 65.5 cents per mile. Furthermore, as vehicle operating costs fluctuate, choosing the right reimbursement solution will ensure drivers are appropriately compensated while containing company expenses.
Deciding on a reimbursement program that aligns with your company’s culture may be challenging. However, a Fixed and Variable Rate (FAVR) program helps you tailor a reimbursement that directly targets your drivers’ daily expenses. This article will explain why a Fixed and Variable Rate (FAVR) program is more cost-efficient and effective than the IRS Standard Mileage Rate.
Why does the IRS standard rate fluctuate year over year?
The chart below shows that the IRS standard mileage reimbursement rate for business mileage has slowly increased since 2011. Notably, some of the most significant increases were from January 1st, 2022, and January 1st, 2023. Specifically, inflation rates, gas prices, and vehicle ownership costs continuing to increase might help explain why we see a significant increase. According to IRS notice 2023-03, the standard mileage rate is supplied by an “independent contractor” who conducts an annual study to determine the standard mileage rates for business use. While the IRS does not provide much more detail into how the rate is calculated, it is inevitable that a driver in San Francisco, California, experiences a different operating expense than a driver in Milwaukee, Wisconsin. And a driver in a truck driving through a mountainous train experiences a different operating cost than someone driving a mid-sized sedan in the city.
IRS Standard Mileage Rate Company Concerns.
Simply put, the IRS-standard mileage rate only provides an accurate cost of ownership in very few scenarios. In many cases, the IRS standard mileage rate also may underpay low-mileage drivers and over-pay high-mileage drivers. AutoReimbursement.com’s Vehicle Reimbursement Program Comparison Guide explains this information in more depth. While the IRS-standard mileage reimbursement rate is based on market fixed, and variable operating costs, it is an estimation at best. While the IRS standard mileage rate is considered the “safe harbor” for reimbursing employees, it creates unpredictable cash flow due to the variability in the rate each year.
Introducing the IRS-Approved Non-Taxable Reimbursement Program.
A Fixed and Variable Rate (FAVR) program can help address many of these concerns raised by the IRS Standard Mileage Rate. Similar to the IRS Standard Mileage Rate, a FAVR program is also an IRS-Approved Non-Taxable vehicle reimbursement. FAVR reimburses the drivers’ expenses based on actual benchmark vehicle data. If your drivers require four-wheel drive or typically drive a truck, their reimbursement is based on a benchmark vehicle with those features. A FAVR program is also geographically sensitive, meaning the reimbursement represents geographically specific expenses like insurance and ad valorem tax. Therefore, a FAVR program calculates direct costs the driver incurs daily. Not only this, it enables driver’s choice— drivers can purchase the vehicle that suits their lifestyle best!
Within a FAVR Vehicle Reimbursement Program, there are two main components.
- Fixed reimbursement: The fixed rate includes depreciation from a benchmark vehicle, insurance down to 44,000+ zip codes, and license, registration, and property tax by state.
- Variable reimbursement: Cost of fuel, maintenance, and tires per mile— this is based on mileage driven each month.
The Fixed and Variable Rate structure helps create predictable cash flows, and AutoReimbursement.com’s industry-leading reporting produces easy-to-understand cost center reporting.
Why partner with AutoReimbursement.com?
AutoReimbursement.com is a leading vehicle reimbursement provider in the FAVR industry. With over 200+ benchmark vehicles (including trucks and SUVs) updated annually, our exclusive program brings certainty to drivers and plan administrators. Many Fortune 500 companies have trusted us to build HR Defensible programs that are cost-effective for companies while also providing a highly regarded benefit to drivers on our Fixed and Variable Rate Programs.
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