The Internal Revenue Service on Jan. 1 will raise to 37.5 cents per mile the reimbursable mileage rate the agency offers businesses to determine per-mile deductible costs for drivers using personal automobiles for business purposes. The new rate, an increase of 1.5 cents, also comes with a new rule, which IRS predicted will increase the number of businesses eligible to use the rate for reimbursement. While the present rules state that individuals using "more than one vehicle at a time cannot use the standard rate," IRS is reversing the policy, extending it to apply to individuals who use up to four cars.
"With this change, more than 800,000 businesses will become eligible to use the standard mileage rate," IRS commissioner Mark Everson said in a statement.
Historically, it has been the smaller companies that have relied on the "safe harbor" rate to avoid maintaining detailed records for when tax season rolls around. The IRS estimated that small businesses would save 8 million to 10 million hours every year in record keeping by using its recommended safe harbor rate in lieu of documenting actuals.
"This is a safe harbor rate, meaning the IRS actually encourages the actuals, but companies can resort to this rate," said Ted Schuerman, director of research and client service within government services at Rochester, Wis.-based management consulting firm Runzheimer International, which provided research to the IRS to determine the rate.
While the rate designated by the IRS simplifies the process, the actual rate of reimbursement can vary.
Such smaller companies as New York-based Taro Pharmaceuticals said they rely on the IRS standard rate to recover mileage expenses, but larger companies, like Xerox, have come up with ways to calculate and maintain records of the actual reimbursable rates that provide a more accurate picture of driving expenses and, ultimately, save money.
This variance hinges on a variety of criteria, including regional gas prices, insurance rates and car types, among others. Also, since the safe harbor rate is a flat rate throughout the year, it does not reflect changes in the actual costs of operating a vehicle as they fluctuate.
Xerox manager of customer service and satisfaction Helen Kuhn developed with IBM an in-house system that automatically determines these fluctuations. Kuhn updates the system on a regular basis to reflect cost changes over time and also uses 86 different cost centers to reflect variable costs by region
(BTN, April 28). The standard mileage rates for businesses are based on research conducted by Runzheimer. Through the research, the IRS determines the fixed and variable costs of operating a car, truck or van. The rate has fluctuated in recent years, corresponding to such costs as gas prices and registration costs, as well as vehicle maintenance expenses, among other factors.
However, one factor is causing the rate to spike 1.5 cents in 2004. "To a large extent, the increase in total cost can be directly attributed to the dramatic climb in gasoline prices over the last year," Schuerman said. Runzheimer added that such costs as those for automobile maintenance and depreciation "changed only marginally, while tire replacements and registration costs remained stable."
"Another cost influencing the cents-per-mile increase is a rise in automobile insurance," Schuerman said. "Insurance increases were driven by various factors, including climbing medical care costs, increases in the number of auto insurance claims and the simple fact that automobiles are now more expensive to repair."
Neil Abrams, president of Abrams Consulting Group, added that the IRS' safe harbor rate applies only to personal vehicles used for business and not corporate-owned cars.
The IRS also said that if companies use the standard rate, they are not allowed to use it in conjunction with other depreciation methods, such as the Modified Accelerated Cost Recovery System--a method companies can use to write off the value of depreciable property over time--since the cost of wear and tear is included in the safe harbor rate.