IRS Rolls Back Standard Mileage Rates for 2021

The IRS has issued the 2021 standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes.

Beginning January 1, 2021, the standard mileage rate for business use of a car, van, pickup, or panel truck will be 56 cents per mile, down 1.5 cents from the 2020 rate. Also down 1 cent is the rate for medical, or moving purposes for qualified active-duty members of the Armed Force, which is 16 cents per mile. Unchanged will be miles driven in service of charitable organizations, set by statute at 14 cents per mile.

Only the second time in the past decade that the IRS has made two consecutive rate reductions, it is the first occurrence of back-to-back decreases since 2016-17. The standard mileage rate for business use is based on an annual study of fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on variables.

Trends from 2020 that affected driving costs and the willingness of the IRS to allow greater deductions included lower fuel prices in 2020, which are on pace to finish approximately 17 percent below the national average when compared to 2019. Slowed vehicle depreciation rates, caused in part by inventory shortages associated with COVID-19 production stoppages, and greater demand for personal transportation, have resulted in increased residual vehicle values. On top of this, despite reduced travel and accidents nationwide, insurance premiums are now 29 percent higher than they were a decade ago. After all, GEICO, Progressive, State Farm, Farmers, Liberty, USAA, Amica, and the General need to somehow pay for all the advertising they do.

In addition to individual tax deductions, the IRS business mileage standard rate offers a tax-free threshold for reimbursements made by U.S. employers. Some organizations reimburse workers for the business use of their mixed-use or personally-owned vehicles that are required for their jobs. The IRS rate is optimal for low-mileage drivers who travel fewer than 5,000 business miles per year. Since it doesn’t account for driving costs that fluctuate, businesses using the rate to reimburse mid- and high-mileage workers are likely to give reimbursements that don’t reflect actual driving costs. By treating all employees’ expenses equally regardless of location or individual situations, reimbursement using the IRS rate creates winners and losers by over- or under-reimbursing them.

Under the Tax Cuts and Jobs Act, taxpayers can’t claim miscellaneous itemized deductions for unreimbursed employee travel expenses. Taxpayers also can’t deduct moving expenses unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station. Taxpayers may use the actual cost of using their vehicle rather than using the standard mileage rates, an option popular with many tax preparers.

Should you opt to use the standard mileage rate, you must use it in the first year the car is available for business use. In later years, you may choose either the standard mileage rate or your actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period, including renewals, if you chose the standard mileage rate. If any of this hurts your head, you may want to consult a tax professional.

[Images: IRS]