The following article was written by Kathryn Mayer and sourced from SHRM.org.

The IRS is once again raising the standard mileage rate.

The agency on Dec. 29 announced that the 2023 business standard mileage rate is increasing to 65.5 cents, up 3 cents from the 2022 midyear adjustment of 62.5 cents. The agency made the rare midyear mileage rate adjustment in June—in addition to a regular annual adjustment announced last December that put the rate at 58.5 cents per mile for the first six months of 2022—as a way to combat the soaring inflation and high gas prices that have been taking a toll on employees.

The 2023 mileage rate took effect Jan. 1. In addition to the 65.5 cents per mile driven for business use, the IRS also announced the standard mileage rate for 2023 will be:

• 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the armed forces, consistent with the increased midyear rate set for the second half of 2022.
• 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2022.

These rates apply to electric and hybrid-electric automobiles, as well as gasoline- and diesel-powered vehicles, the IRS announced.

Driving costs increased overall in 2022 due to factors including high gas prices, surging vehicle acquisition costs due to ongoing supply chain constraints, and considerable increases in vehicle ownership and maintenance expenses, according to Motus, a Boston-based mobile workforce management software firm.

“We’re currently facing extraordinary economic volatility, which has contributed to wide fluctuations across vehicle costs,” said Todd Gebski, Motus’ chief strategy and marketing officer. Motus noted that gas prices rose 49 percent for regular gasoline and 55 percent for diesel fuel over the first six months of 2022. Although gas prices dropped recently, with 26 states reporting gas prices below $3 a gallon, according to fuel savings platform GasBuddy, prices are expected to go back up next year. GasBuddy predicted average gas prices in June 2023, for example, will rise to between $3.79 and $4.19. The average cost per gallon could reach as high as $4.25 in August.

The standard mileage rate is used to compute the costs that are deductible by businesses and self-employed individuals for operating an automobile for business use, as an alternative to tracking actual costs. Employers often use the standard mileage rate to pay tax-free reimbursements to employees who use their own vehicles for business.

Some experts say the IRS rate is optimal for low-mileage drivers who travel fewer than 5,000 business miles per year; however, it does not account for differences in vehicle ownership and operating costs, which can fluctuate throughout the year and are geographically specific.

Alternatively, employers can leverage maximum vehicle expenses when using a Fixed and Variable Rate (FAVR) allowance plan. Under FAVR, employees who drive their own vehicles can receive tax-free reimbursements from their employers for fixed vehicle costs (such as insurance, taxes and registration fees) and variable vehicle expenses (such as fuel, tires, and routine maintenance and repairs), instead of the standard mileage rate.

Under a FAVR plan, the cost of the vehicle may not exceed a maximum amount set by the IRS each year. For 2023, the standard automobile cost may not exceed $60,800 for automobiles, trucks and vans. That’s up from a $56,100 threshold in 2022, the IRS reported in Notice 2023-03.

Need to get in touch? Want to learn more?