I get asked about mileage reimbursements rates from time to time. I recently replied to someone and suggested using a modified calculation based on a percentage of local gas prices, which I thought I may as well post here for everyone’s benefit:
Client ‘s Original Mileage Reimbursement Question
Didn’t you suggest using something like 12.5% of local gas prices as a mileage reimbursement proxy instead of the IRS mileage reimbursement rate?
Yes, it’s just a suggestion because 12.5% or 15% or something in that range will give a good, fair reimbursement that covers gas and maintenance for cars. It would come out to something more like $0.34-$0.40, for example, based on a $2.69/gallon gas price.
What folks don’t realize is the federal mileage rate is high because many businesses use trucks and vans and haul loads, which requires more gas. Also many businesses operate inside of city limits with stop-and-go traffic and idling at red lights. Sometimes they own their own fleet, but sometimes they don’t, and they will likely only own vehicles if the GVW exceeds three tons (6,000 lbs.) since the IRS severely caps deductibility of vehicles owned by a business that weigh less than three tons. True story; you can’t make this stuff up.
So what’s with the IRS Rate?
In essence, the IRS rate is a blended rate, or a ‘one-size-fits-most’ rate based on the different vehicle types that business owners and employees drive. Most businesses that reimburse employees for mileage do so at this IRS standard rate, which doesn’t encourage thrift if they’re just paying someone to drive themselves around. For example, a hospice employee driving a route or a CPA visiting a client only have themselves and a laptop, and likely don’t require a large SUV, truck, or van. These only clog up roadways with unnecessary weight and size and consume excess fuel whenever they’re hauling one person. Instead, individual commuters should rely on an economical vehicle with great mileage for transportation, and I even think there should be incentives on both sides to ‘right-size’ what vehicles employees use when driving for businesses—like an additional IRS incentive on both individual and business returns for high mpg vehicles. So, my honest thoughts and feelings on this issue are that lower mileage rates benefit the employee, the company, and the environment by creating creative constraints under which employees will prioritize better mileage vehicles, which also just happen to be lower TCO (total cost of ownership), more reliable and cheaper to maintain. Employees may need persuading to understand this, and that’s fine. It’s simply a matter of communicating the why behind the what.
Just my $0.02.