Regardless of your business type, if there is an increase in mileage rates, you should take action and do what you can to ensure you get the best deal. Here are some tips to help you do just that.
Business travel
Whether you’re a business owner, a business traveler, or both, you will likely notice the increased mileage rates for business travel in recent years. The IRS has chosen to raise the rates mid-year to reflect the rising cost of gasoline better. The new rates will take effect on July 1, 2022.
The IRS has also announced an increase in the optional standard mileage rate for the second half of 2022. The standard mileage rate is now 62.5 cents per mile. For the most part, most companies will stick with the standard rate. If you have employees who drive for business, you’ll want to ensure you use your hard-earned dollars wisely. Similarly, if you’re a company that reimburses employees for travel expenses, you’ll want to follow the law.
In addition to the new mileage rates for business travel, the IRS has also announced a new standard mileage rate for medical and moving travel. The new rates will be more than a penny per mile for medical and moving travel, a significant increase from the previous 22 cents per mile. While you’re at it, you should reconsider how you pay your staff. If you’re paying less than the federal minimum wage, you’re not only wasting your hard-earned money. You may be in breach of the law. For more information, consult a qualified tax professional.
While you’re at it, you should do your due diligence on calculating the correct mileage rate for your company. An excellent mileage rate is a key to maintaining employee productivity while minimizing overhead. Whether you’re looking to reduce your tax burden or increase your employee’s morale, there are a few simple steps you can take to get started.
Moving and medical expenses
Generally, federal mileage rates are updated several times a year to account for inflation. The federal tax code categorizes mileage rates into service expenses and medical expenses. For instance, if you drive to work, you can claim a business mileage deduction. Similarly, if you take your car to the doctor, you can claim a medical mileage deduction.
For professional use, the usual mileage cost is 14 cents per mile. A higher rate is used to calculate medical and moving expenses. The actual rate for medical and moving purposes is 18 cents per mile.
The IRS claims the 4-cent increase is due to rising gas prices. The scarcity of supply is one factor contributing to this surge.
The IRS has released guidance on the standard mileage rate for the 2022 tax year. Previously, the standard rate was around $3.28 per gallon. With inflation on the rise, the rate should increase to around $5.35 per gallon by 2022. It is the most significant increase since the IRS began tracking mileage rates.
Regarding possible expenses, the usual mileage rate for relocation and medical reasons is just the beginning—deductible transportation costs. For instance, you can deduct your parking and tolls separately. However, you can’t deduct repair and maintenance. If you’re planning to file a tax return, it may be worthwhile to check out Revenue Procedure 2019-46 to see what you can claim.
Generally, the best way to claim your moving or medical expenses is to itemize your expenses on your tax return. The IRS has a variety of information on deductible transportation costs in its publication 502: Deductions for Personal and Business Use of Vehicles.
Tax-free reimbursements for employees
Whether you provide your employees with a company car or a personal vehicle for business, you may need to reimburse them for mileage. It is a tax-free benefit but can impact your income tax and bottom line.
You need to calculate the appropriate amount if you reimburse your employees for mileage. It can be done by multiplying the millage rate by the total miles the employee drives.
Some companies use the IRS Standard Mileage Rate to reimburse employees. This rate is 56 cents per mile for 2021 and 58.5 cents per mile for 2022. The rate also includes insurance, registration, maintenance, and gas. The rate will vary depending on the size of your organization and the area you operate in.
Other companies reimburse employees for mileage using a Fixed and Variable Rate (FAVR) plan. It is a practical, low-cost solution that helps eliminate tax waste. However, this method can result in a lower reimbursement if you live in a high-cost area.
If you use a cents-per-mile rate, you may need to multiply the mileage rate by the miles the employee drove. It may provide a more accurate reflection of the employee’s income. However, this method can also result in additional fees.
Some companies process expense payments through an accounts payable system. These payments are separate from payroll. It may help keep your company out of a tax audit.
You must make payments separately from your salary if you reimburse your employees for mileage. You must also keep records of the reimbursements. The reimbursements will not be taxable if they are below the IRS Standard Mileage Rate.
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