The IRS has just announced the official standard mileage rates for 2016. The IRS mileage rates for 2016 for the use of a vehicle are:
- 54 cents per mile for business use
- 19 cents per mile driven for medical reasons or moving purposes
- 14 cents per mile driven for charitable purposes.
The IRS mileage rates for 2016 apply to miles driven starting January 1, 2016.
IRS mileage rates for 2016 reflect a decrease compared with the 2015 rates. The 2016 mileage rates are a 3.5 cent per mile reduction for business miles compared with 2015. Rates dropped 4 cents per mile for medical and moving purposes. Charitable mileage rates remained exactly the same.
The IRS sets mileage rates each year for business, moving and medical purposes after conducting a study of the costs of operating a vehicle. The official IRS notice states, “An independent contractor conducts an annual study for the Internal Revenue Service of the fixed and variable costs of operating an automobile to determine the standard mileage rates for business, medical, and moving use reflected in this notice. The standard mileage rate for charitable use is set by § 170(i).”
To some observers it’s no surprise that the mileage rate for 2016 actually went down. Fuel costs make up a substantial part of the operating costs of a vehicle, and gasoline prices are at a six-year low. They dropped throughout most of 2015, when the costs study was being conducted.
According to the IRS, the 2016 mileage rates apply to miles driven in the following types of vehicles:
- automobiles (cars)
- pickup trucks
- panel trucks
How to Claim the Standard Mileage Rate for Business
The standard mileage rate is an “optional” method of claiming a tax deduction for the costs of operating a vehicle.
What this means is, you don’t have to use the standard mileage rate. You could instead choose to keep track of all your actual expenses of operating a vehicle. Actual expenses include the costs of gasoline, repairs and other maintenance costs. If you choose to deduct your actual expenses, the IRS requires you to maintain adequate records and documentation of those actual expenses.
Because record keeping of actual expenses is a laborious chore, most small business owners and the self employed opt to use the standard mileage rate. It’s easier and more convenient.
That’s why the mileage rate is so important to small businesses.
Remember, even if you choose the easier standard mileage rate you still must keep track of the actual miles you drove. You must be able to document the purpose for the miles, also.
How do you keep track of miles driven? Usually that is done by making a notation in a notebook. Or, in this day and age, many small business taxpayers use a mobile app or software program to keep track of miles driven.
There are a variety of apps used by small businesses to track mileage and other expenses. (See: 10 Small Business Tax Apps; List of Time and Expense Tracking Apps; and Everlance Mileage Tracking Through GPS.)
Once you tally up the number of miles you drove during the year for business purposes (or moving, medical or charitable purposes, as the case may be) you multiply them by the applicable cents-per-mile rate. For example, let’s say that in 2016 you drove your pickup truck 1,000 miles for deductible business purposes. You would multiply 1,000 by .54. The result is $540 as a claimed mileage deduction.
Reimbursing Employees Who Use Their Personal Vehicles for Business
Many employers consider it fair to reimburse their employees for business use of a personal vehicle. Often when they do, they choose the standard mileage rate as the amount they will reimburse.
However, it is up to the employer to decide whether to reimburse an employee. It’s also up to the employer to decide how much the reimbursement for business travel will be. This varies from company to company.
Employees should check their employee handbooks and/or their employer’s written reimbursement policy. Or ask your supervisor or Human Resources department.
Employees please note, “business use” is not the same as commuting to your job. Employers don’t usually reimburse employees for their daily commuting costs, absent special circumstances. Business use typically means travel for the employer’s business outside of your normal commute. Check the handbook or policy for what your employer defines as reimbursable business travel.
Small business employers, be sure to update your policies and handbooks for the 2016 mileage rate. This is especially important if it’s your policy to adopt the standard mileage rate as the amount you reimburse employees. Also, notify employees of any annual changes.
Businesses usually deduct as a business expense the amount reimbursed to the employee. The reimbursement normally isn’t treated as taxable income to the employee. Instead, you are making the employee whole by reimbursing him or her. However, if you don’t reimburse your employee who uses a car or other vehicle for business purposes, then the employee may be able to deduct the unreimbursed expense on his or her 1040, Schedule A. In that case, you as the employer do not get to claim the deduction.
For More On IRS Standard Mileage Rates for 2016
There are some limitations on when a small business can use the standard mileage rate.
The IRS notes, “A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.”
Check with your tax advisor (or your tax or accounting software program) regarding applying the mileage deduction rules in your specific situation.
Typically, the IRS mileage rate will apply for the entire year once it is announced. However, there is precedent for a mid-year adjustment. Five years ago, the IRS did a mid-year rate increase due to high gasoline costs at that time. However, that mid-year move was unusual.
Go here for the official IRS notice for the mileage rates.
Remember, if you are working on prior years’ tax returns, be sure to use the applicable year’s mileage rates. See our earlier announcements: