The release of the 2023 standard mileage rate by the IRS shows that the rate is increasing. The new unit kilometer rate for 2023 is 65.5 cents per mile.
That’s a 0.3 cent increase from the 2022 standard mileage adjustment that the IRS announced earlier this year to combat inflation and higher gas costs.
2022 IRS Mileage Reimbursement Rate
For 2023, the IRS mileage reimbursement rates for businesses, individuals and other organizations are as follows:
- 65.5 cents per mile for business use, 3 cents more than the mid-year increase that sets the rate for the second half of 2022.
- 22 cents per mile driven for medical or relocation purposes for qualified active duty military personnel, in line with the increased semi-annual rate set for the second half of 2022.
- 14 cents per kilometer driven on behalf of non-profit organizations; the rate is set by law and will remain unchanged from 2022
The IRS goes on to say that this increase applies to electric and hybrid-electric cars, as well as gasoline- and diesel-powered vehicles.
An annual study of the fixed and variable costs of operating a motor vehicle is used to determine the standard mileage rate for business use.
The mid-year increase in 2022
Due to high pricing in early and mid-2022, the IRS increased the optional standard mileage rate from July 1, 2022 to December 31, 2022. The sizeable increase was almost twice what it had been since the beginning of the year. It increased by 4 cents for official use and medical care as well as for active members of the Bundeswehr. The IRS rarely does a mid-year hike, the last one being in 2011. This comes after House Democrats asked the Internal Revenue Service (IRS) to increase the mileage reimbursement rate.
Who can deduct the car costs from the tax return?
If you own a business or are self-employed and use your vehicle for business purposes, you can deduct vehicle expenses on your tax return. On the other hand, if you, as a taxpayer, use your car for both business and pleasure, you have to split the expenses. The deduction is based on the proportion of kilometers used for business purposes.
How to calculate car cost, actual cost and using standard mileage:
Actual expenses include:
- depreciation
- lease payments
- gasoline and oil
- tires
- Repairs and tuning
- insurance
- registration fees
Use of standard mileage rate
If you are using the standard mileage rate for your own car, you must elect to use this method in the first year that the car is available for your company’s use. If you want to use the standard mileage rate on a car you lease, you must use it again for the entire lease term.
Allowances and reimbursements for alternative vehicles
If you drive your own car, you can also use the Fixed and Variable Rate Compensation (FAVR) plan to recover fixed and variable vehicle expenses tax-free from your employee. Fixed costs are items such as insurance, taxes and registration fees. Variable costs are expenses such as fuel, tires, and routine maintenance and repairs.
There are some exceptions to this allowance. Your car can’t cost more than what the IRS sets as the maximum each year. For example, your 2022 vehicle may cost more than $56,100 for cars, trucks, and vans.
Flat car grants are another way employers can reimburse employees for business travel expenses. This is a fixed amount that an employer can give its employees to cover the cost of using their own vehicle for business purposes over a period of time.
The amount may vary depending on the location, task and vehicle type. However, both parties can agree on a fixed amount, e.g. B. $750 for wear and tear, tires and of course the cost of fuel. Keep in mind that these allowances are taxable unless action is taken. So find out what the tax obligations of both parties are.
No more tax deduction for employees
The IRS no longer makes deductions for employee business expenses related to driving. This started in 2018 and will continue until 2025 due to the Tax Cuts and Jobs Act (TCJA). According to the IRS, “Employees who use their automobiles for work may no longer claim an employee business deduction as part of their miscellaneous itemized deductions reported in Schedule A.”
The agency goes on to say that even if their employer doesn’t reimburse the employee for using their own car, employees can’t deduct this. However, there is an exception for a specific group. Armed Forces reservists, qualified performing artists, and fee-paying state or local government officials may continue to deduct unreimbursed employee travel expenses.
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