The Internal Revenue Service (IRS) recently released its inflation-adjusted standard mileage allowances for 2017, as well as maximum vehicle value thresholds to be used in calculating fixed and variable rate (FAVR) allowances.
For all miles of business use, the standard mileage rate for transportation or travel expenses is 53.5 cents per mile (down slightly from 54 cents in 2016), according to IRS Notice 2016-79. The standard rate is 14 cents per mile (same as last year) if an automobile is used to render gratuitous services to a charitable organization, or 17 cents if used for medical care or a deductible move (a 2-cent reduction from 2016).
For automobiles a taxpayer uses for business purposes, the portion of the business standard mileage rate treated as depreciation is 23 cents per mile for 2013, 22 cents per mile for 2014, 24 cents per mile for 2015, 24 cents per mile for 2016, and 25 cents per mile for 2017.
The rate revisions reflect fluctuations in costs related to driving, such as gasoline and auto insurance, as well as changes in vehicles’ depreciation rate.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than the standard mileage rates. Revenue Procedure (Rev. Proc.) 2010-51 provides the rules for computing the deductible costs of operating an automobile for business, charitable, medical, or relocation expenses; and for substantiating the expenses under Code Section 274(d) and Treas. Reg. §1.274-5.
FAVR Allowances
The FAVR allowances apply to so-called “Runzheimer plans” for reimbursing employees’ use of their own or leased vehicles to conduct company business. Named for the company that markets many of these plans, Runzheimer plans allow employers to reimburse employees for the use of their cars with a fixed periodic payment, plus a periodic cents-per-mile allowance.
For purposes of computing the allowance under a FAVR plan, the maximum allowable cost in 2017 is $27,900 for cars (down from $28,000 in 2016) and $31,300 for trucks and vans (up from $31,000).
The fixed portion of the FAVR reimbursement reflects the vehicle’s projected fixed costs, such as depreciation, lease payments, insurance, registration, license fees, and personal property taxes. The variable portion reflects the costs that vary depending on the number of miles driven, such as gas, oil, tires, and routine maintenance and repairs.
Under a FAVR plan, the amount of an employee’s transportation expenses is deemed substantiated, but the employee still must substantiate business mileage. If the substantiated miles are less than the assumed average miles used to calculate the FAVR allowance, the employee must repay the portion of the variable allowance that corresponds to this discrepancy. If the employee does not repay this amount, then it must be included in the employee’s income and subject to withholding and reporting.
Many restrictions and limitations apply to the use of FAVR plans. For example, FAVR allowances may not be provided to “control employees” or if, at any time during a calendar year, a majority of employees a FAVR allowance covers are management employees—unless at all times during that year FAVR allowances are provided to at least five employees.
FAVR allowances may be provided only to an employee who substantiates at least 5,000 business miles driven in a calendar year or, if greater, 80% of the estimated annual business mileage used in calculating the FAVR allowance.