Now that your 2021 taxes are officially filed, it is not too early to start thinking about next year’s 2022 tax return.
One of the biggest changes for businesses to consider is that the Internal Revenue Service (IRS) announced in December 2021 that it was raising the 2022 optional standard mileage rates used to calculate costs of operating an automobile for business purposes.
New Standard Mileage Rates Took Effect Jan. 1, 2022
The new standard mileage rates for the use of a car (also vans, pickups and panel trucks) began on January 1, 2022:
- 58.5 cents per mile driven for business use, up 2.5 cents from the rate for 2021
- 18 cents per mile driven for medical, or moving purposes for qualified active-duty members of the Armed Forces, up 2 cents from the rate for 2021
- 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2021
“The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs,” said the IRS in a release.
Tax Cuts and Jobs Act Travel Reimbursement
The IRS noted that under the Tax Cuts and Jobs Act, taxpayers cannot:
- Claim a miscellaneous itemized deduction for unreimbursed employee travel expenses
- Claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station
For more details see Moving Expenses for Members of the Armed Forces.
Standard Mileage Rates vs. Actual Costs
Taxpayers and businesses always have the option of calculating the actual costs of using their vehicle (by maintaining adequate records or other sufficient evidence) rather than\ using the standard mileage rates (also called the safe harbor rate).
“Taxpayers can use the standard mileage rate but must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses,” said the IRS release.
Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.
Important Tax Rules for Using Vehicles for Business
Organizations and taxpayers should pay close attention to IRS Notice 22-03 which includes other important tax information for using vehicles for business including:
- Basis Reduction Amount: For automobiles a taxpayer uses for business purposes, the portion of the business standard mileage rate treated as depreciation is 25 cents per mile for 2018, 26 cents per mile for 2019, 27 cents per mile for 2020, 26 cents per mile for 2021, and 26 cents per mile for 2022.
- Maximum Standard Automobile Cost: For purposes of computing the allowance under a fixed and variable rate (FAVR) plan, the standard automobile cost may not exceed $56,100 for automobiles (including trucks and vans).
- Maximum Value of Employer-Provided Automobiles: For purposes of the fleet-average valuation rule and the vehicle cents-per-mile valuation rule, the maximum fair market value (FMV) of automobiles (including trucks and vans) first made available to employees in calendar year 2022 is $56,100.
“The IRS rate is optimal for low-mileage drivers, such as those who travel fewer than 5,000 business miles per year, according to benefits advisors,” reported SHRM.
THE FAVR plan allowance, according to Investopedia, includes two payment types, periodic fixed payments and periodic variable payments:
- Periodic Fixed Payments: Includes fixed costs associated with driving and owning the vehicle, including depreciation, insurance, registration fees, and taxes. The total costs for these expenses are calculated and then adjusted to reflect the percentage of the time the vehicle is used for business purposes.
- Periodic Variable Payments: Includes operating costs, such as fuel, oil changes, tires, and routine maintenance.
SHRM says that “an employer may provide a FAVR allowance only to an employee who can provide adequate records showing at least 5,000 miles driven during the calendar year in performing services as an employee or, if greater, 80 percent of the annual business mileage of that FAVR allowance.”
Justworks, a payroll, benefits and compliance firm in New York City, told SHRM that the advantage of using a FAVR plan to reimburse employees is that “in locations with higher automobile operating costs, the FAVR allowance may be more than the standard mileage rate."
On the flip side, Justworks says that "the disadvantage is that the employer must recalculate the FAVR allowance at least once every three months," as payments to employees must be made at least quarterly.”
This can be a lot for a small business owner to manage. We understand that, let us help you.