3 Surprising Factors That Determine The IRS Mileage Rate
The 2019 IRS “safe harbor” mileage rate is a fascinating example of the political, technological, and economic factors into one mileage rate.
Each year, the IRS issues a new optional standard deduction rate, otherwise known as the IRS “mileage rate.”
In 2019, the IRS issued its new optional standard deduction rate for automotive mileage: 58¢ per mile driven for business purposes, 20¢ per mile driven for medical and moving purposes, and 14¢ per mile driven for charitable purposes.
The rates increased significantly from 2018 due to a complex variety of reasons. This increase sheds an interesting light on the factors that can come into play for IRS mileage rates. Reach on to learn more about what those factors are.
What Factors Into the IRS Mileage Rate?
The 2019 deductible rate represents a 3.5¢ increase over the year prior, which was one of the largest year-over-year changes to the IRS mileage rate in the last decade. Why? Economic forecasts. Most experts had predicted gas prices to drop and inflation to hold steady in 2019.
But the IRS mileage rate is not a simple projection of gas prices and consumer costs. Actually, it’s a fascinating composite index that unifies diverse data from across the economy.
To get to the bottom of the 2019 mileage rate, we went directly to studies published by Motus, the third-party contractor that advises the IRS on deductible rates for automotive expenses. In their research we found a surprising number of macro trends that were predicted to influence the cost of owning and operating a vehicle in 2019. Here are three of the most interesting.
2019 Trends Influencing the Cost of Owning and Operating Vehicles
Heading into 2019, many economic forecasters predicted the year to see an overall drop in gas prices. Motus disagreed. As is often the case with the price of oil, the only guarantee they see is volatility. “Analysts have gone from predicting an unprecedented surge in fuel prices in 2019 to depressed prices from a market oversupply in a short and unpredictable seven-week span,” the analysts write in their 2019 Fuel Trends Report.
As it stands, Motus expected a 7% fuel price increase between January and June 2019—from a national average of $2.37 to $2.52—as summer driving season approaches. But a big question mark loomed in the geopolitical arena.
In November 2018, the US government imposed sanctions on Iran, one of the world’s top oil producers. To stave off a potentially disastrous shortage of crude oil, the US extended sanctions waivers to Iran’s biggest oil customers for 180 days—and encouraged other oil producers to ramp up production to make up the shortfall. Iran’s customers were between a rock and a hard place: between buying its oil and doing business with the United States. “Concerns over an abrupt falloff in crude supply could drive a short-term price spike,” worry the Motus analysts, who also fear US sanctions against other oil producers in 2019.
Stability in the oil market this year felt just as possible as disruption. But to price in the volatility of this essential commodity, the analysts recommended budgeting for an increase in the cost of fuel.
While fuel comprises less than a quarter of a vehicle’s annual operating expenses, about 37% of the total cost is depreciation. And in 2019, depreciation was predicted to increase—partly thanks to ridesharing.
Apps like Uber, Lyft, and Via have changed the way travelers get around. Arguably no industry has been harder hit than car rental. Much like traditional livery has struggled to compete with its smartphone disruptors, rental car businesses have ceded important market share to the rideshare revolution.
As rental companies cull their fleets to meet softer demand, they unload extra cars onto the secondary market, resulting in a glut of used vehicles. This surplus puts downward pressure on the resale value of every car on the road, which conversely increases its depreciation.
“In business vehicle programs, residual value is a major contributor to capital costs, working as a handshake with the upfront costs,” write the Motus analysts. The value of the asset itself is an important budgetary consideration for vehicle owners, and 2019’s higher deductible rate reflects those accelerated write-downs.
Over the past few years, insurance companies have suffered significantly from natural disasters. In auto insurance especially, policy writers have dealt with years of unprofitability due to weather-related claims. With some of the costliest-ever storms and fires in the recent past, there was no reason to improve that outlook in 2019.
Natural disasters aren’t the only cause of losses in the insurance industry, but as Geico put it in their 2017 10-K, “Extraordinary weather conditions have a significant effect upon the frequency or severity of automobile claims.” To offset these losses, auto insurance premiums rose for both commercial and corporate customers. As such, the IRS mileage deduction rate rose along with it.
The New Tax Treatment of Mileage Deductions
Keep in mind that ever since the Tax Cuts and Jobs Act of 2017, employees cannot use the standard mileage rate to claim an itemized deduction for unreimbursed employee travel expenses. This new tax treatment of the mileage deduction will be in place through 2025.
Pricing in Volatility
Some of the factors combined into the IRS’s mileage reimbursement rate are not revealed to the public. Others are interesting, but obvious. (Did you know that computerized vehicles have caused the cost of maintenance to rise? That’s factored in as well.)
It makes sense that the cost of auto ownership and use reflects macro-scale trends in the global economy. In turbulent times, with disruptions predictable in the price of oil, used vehicles, and insurance, the IRS has clearly opted to allow set their annual deduction at a generous rate to price in that volatility.
Abacus’s expense management software automatically updates to reflect the new rates. So each year, customers can trust that no action is necessary on their part unless they plan on using their own rate for mileage reimbursement.