The Internal Revenue Service sets a standard mileage rate each year. Business owners use this rate to calculate mileage deductions or reimburse employees for business miles put on their personal vehicles.
So what, exactly, is the rate now? And how do you use it? We’ll cover all that and more, so keep reading!
What Is the IRS Standard Mileage Rate for 2023?
Effective Jan. 1, 2023, the IRS standard mileage rate is 65.5 cents per mile. It went up 3 cents this year—from 62.5 cents per mile—due to high gas prices and the rising costs of buying and maintaining a vehicle.
The mileage rate is a default cost per mile set by the IRS. They set three rates every year:
- Business mileage: 65.5 cents per mile
- Miles in service of charitable organizations: 14 cents per mile
- Medical or moving purposes for active-duty military: 22 cents per mile
This article focuses on the rate for business use, but the tax authority has all three rates back to 2011 available on its website.
Business mileage rates for 2022 included:
- January through June 2022: 58.5 cents per mile
- July through December 2022: 62.5 cents per mile
Typically, mileage rates are set once per year in November or December, but last year the IRS increased them in July due to skyrocketing gas prices. And, as you know, in January 2023, they increased them again. Will another increase take place this summer? If costs keep rising, it's a definite possibility. However, at this time, it's still unknown.
How the IRS Sets Mileage Rates
The IRS bases this rate on data compiled by the software company Motus. They gather data from the whole country, including information on gas and oil prices, repair and maintenance costs, automobile insurance premiums, travel expenses, depreciation, and other costs of owning and operating a car.
What Is Considered Business Mileage?
Business mileage is any driving done solely for business purposes. For example, if you drive to meet with clients, check on a job site, go to the bank to deposit business checks, pick up supplies, or run other business errands, these are all business miles.
If your vehicle is used 100% for business then you don’t need to worry about tracking business auto expenses—you can deduct all of your vehicle expenses, including interest on the auto loan (if financed), fuel, maintenance and repairs, registration fees, taxes, and auto insurance.
How to Use the IRS Mileage Rate
You can use the IRS’s mileage reimbursement rate in two ways:
Deduct Business Use of Your Personal Vehicle
Say you’re a sole proprietor who owns a pickup truck that you drive for both business travel and personal trips. You can deduct your business travel expenses two ways:
Keep track of all of your auto expenses for the year and multiply those expenses by the percentage of miles you drove for work. For example, if your total expenses were $10,000 and half of your driving was for work, your deduction would be $5,000 ($10,000 x 50%).
The Standard Rate
To use the optional standard mileage rate in 2023, multiply the miles you drove for work by the IRS mileage rate of 65.5 cents.
Deduction = Miles Driven x Standard Mileage Rate of 65.5 cents
You can then deduct this amount from line 9 on your Schedule C to get those tax savings.
But, wait, taxes are due soon for 2022 aren't they? So wouldn't you need to use old mileage rates? Yes, if you're calculating back to 2022, you'll want to use the 2022 mileage rates to figure out how much to deduct from your taxes due in April. Those are as follows:
January through June 2022: 58.5 cents per mile
July through December 2022: 62.5 cents per mile
Now, let’s say you drove 3,400 miles for business from January through June and 2,800 business miles during the remainder of the year. In that case, using the IRS mileage rate, you would calculate your business mileage deduction as follows:
Deduction = Miles Driven x Standard Mileage Rate for January through June 2022
= 3,400 miles x $0.585
Deduction = Miles Driven x Standard Mileage Rate for July through December 2022
= 2,800 miles x $0.625
Now add them up:
$1,989 + $1,750 = $3,739
So you would deduct $3,739 on line 9 of your 2022 Schedule C.
Keep in mind that the rate doesn’t cover the cost of parking fees and tolls. You can deduct these expenses in addition to your calculated car expenses.
Also, don’t count your commuting expenses—the miles you drive between your home and place of business—in your business miles. Commuting expenses are personal miles according to IRS rules.
Reimburse Employees for Their Work Miles
Say you have an employee who occasionally uses their personal vehicle to visit job sites and run business errands. You want to reimburse them for the fuel costs and wear and tear associated with driving for the business.
This is a smart way to keep employees happy. What’s more, expense reimbursements are a non-taxable fringe benefit, meaning they’re tax deductible for the business and not considered taxable income for the employee—it’s a win/win.
One way to calculate that repayment is with the mileage reimbursement rate. So if your employee drove 20 miles in January of 2023, you would issue an expense repayment of $13.10 (20 miles x $0.655) for that month.
Other Ways to Compensate Employees for Business Driving
The mileage rate isn’t the only way to compensate employees for their business driving. Here are some other options to consider.
Standard Car Allowance
You can give employees who drive for business on a regular basis a standard car allowance. For example, you might give employees who drive for work an extra $50 per month to cover gas, oil changes, and wear and tear on their vehicles.
However, because this allowance isn’t based on actual miles driven and doesn’t require the employee to track their miles or submit receipts, the IRS doesn’t consider it to be a reimbursement. Instead, it’s a taxable fringe benefit for the employee, meaning it’s subject to income and payroll taxes, just like their regular wages.
This method isn’t as valuable to employees as it once was. Prior to the Tax Cuts and Jobs Act of 2017, employees could claim their miles driven for work (as well as other out-of-pocket business expenses) as miscellaneous itemized deductions on their individual tax returns.
Tax reform suspended that particular type of tax deduction. So if you reimburse employees using a standard allowance, they have more taxable income, but won’t be able to deduct their car expenses.
Fixed and Variable Rate (FAVR) Program
A FAVR is a combination of a monthly allowance and mileage reimbursement. The fixed portion covers the employee’s fixed costs—insurance, depreciation, and registration fees—while the reimbursement covers variable costs like gas, oil, maintenance, and tires.
Instead of using the usual IRS mileage rate—which is a one-size-fits-all reimbursement—you base reimbursements on a cents-per-mile rate set by the business and based on local gas prices.
Some people like FAVR car allowances better than using the optional mileage rates because they can take into account month-to-month fluctuations in fuel prices and cost discrepancies between different parts of the country.
FAVR reimbursements are also not taxable income for employees. However, according to the tax code, they’re only available to companies with employees who drive more than 5,000 miles for business on a yearly basis.
You can find more information on the FAVR program in Revenue Procedure 2010-51.
What Mileage Records Do I Need to Keep for the IRS?
The IRS requires you to keep records of the miles you drive for business. Your mileage records should include:
- How many miles you drove for each trip
- The date of your trip
- Where you went
- The business purpose of the trip
You can track this information in a paper log kept in the glove compartment, a spreadsheet, or use an app that automatically tracks your mileage and allows you to categorize each trip as either business or personal.
You don’t have to submit your mileage records when you file your tax return, but you’ll be happy you have them on hand if an auditor knocks on your door.
Keep up with Mileage Rate Increases
Whether you or your employees are using personal vehicles for work, it’s helpful to know the standard mileage rate. That way, you can accurately deduct any driving expenses and make sure you’re compensating your team fairly.
Just remember—for 2023, the standard mileage rate is 65.5 cents per mile. And stay tuned for any future updates.
Now that you’re ready to track your miles and calculate your car expense deduction, the only thing left to do is hit the road!