THE STANDARD MILEAGE RATE IS ADJUSTED EACH YEAR. TO GAIN INSIGHT INTO IRS MILEAGE RATE 2021 IN GENERAL, HOW IT WORKS, AND HOW IT COMPARES TO THE ACTUAL EXPENSES RATE, READ THE ARTICLE BELOW.
Internal Revenue Service has announced the standard mileage rate for the year 2021 in the last month of 2020. It provides information about the mileage rates for a vehicle that’s used for business, medical, and other types of purposes. To learn about what rules are being applied and adjusted by IRS of this particular topic, read this article and discover useful insights about IRS Mileage Rate 2021.
What is IRS Mileage Rate?
Standard mileage rate, which is sometimes also referred to as deductible mileage or mileage per diem, is the default per mile cost assigned by Internal Revenue Service (IRS). It is set and regulated so taxpayers are able to deduct their vehicles’ expenses for several purposes such as business, medical, or charitable. IRS adjusted the rate every year.
IRS mileage rate is especially useful to be used by self-employed persons or small-scaled businesses in order to estimate their tax deduction from vehicle expenses. The employer or business owner choose to use the IRS mileage rate will have a simpler and easier way to calculate the costs, instead of having to constantly keep track of their vehicle expenses, which include gasoline, tires, insurance, registration, maintenance, and license fees.
Keep in mind that the standard mileage rate for business can only be applied for trips related to your work. Daily commuting between work and home is not qualified to be included in this tax deduction type.
How is The IRS Mileage Rate Is Set?
The standard mileage rate is set by the IRS based on annual data and analysis of vehicle costs, which compiled by a third-party research firm contracted by the government agencies, Runzheimer International. The organization manages to collect and assess the data such as gas prices, insurance premiums, depreciation, maintenance costs, and other vehicle operating expenses from across the country.
For vehicles used for business purposes, the deduction of standard mileage is based on the fixed costs and variable costs of running the car. Meanwhile, for vehicles used for medical or charitable purposes, the deduction of standard mileage is based on the variable costs of running the car only.
Tax deduction for a vehicle that’s used for a charitable purpose is established by minimums set on federal law. It is meant to provide reimbursement for taxpayers that used their pocked for volunteer work.
Standard Mileage Rate VS Actual Vehicle Expenses
There are two tax deduction options regarding vehicle expenses if you use them for business purposes. There are IRS standard mileage rate methods and actual expense methods. How do both differ from each other?
If you choose to use IRS Mileage Rate 2021 method, then you need to keep track and record the amounts of miles driven on your car for business purposes along with the total of it. You are also required to note the date, destination, and purpose of the trip, and provide them in an organized way.
You won’t be able to deduct the tax based on its actual expense costs by this method. It means that you aren’t allowed to deduct the gasoline, repairs, maintenance, repairs, insurance, and registration fees before the standard mileage rates already include these items along with the depreciation.
It is often recommended to choose a standard mileage rate for those who use smaller cars, especially if the number of the mile is high. There is also more chance that you’ll be benefited from this method if you drive an inexpensive or old vehicle. This is because you are able to gain the same tax deduction fixed rate, regardless of your car’s worth. Also, as IRS mileage rate consider depreciation, it may benefit inexpensive vehicles more than expensive ones.
Alternatively, instead of using IRS Mileage Rate 2021 method, you may use actual expenses and factor the depreciation. This method allows you to provide more tax deductions if you drive more expensive or larger vehicles such as a minivan or SUV cars. This method is also generally recommended if the number of your vehicle’s business miles is on the lower side.
However, the actual expenses method requires you to do more work. If you choose to utilize this method, then you have to keep track thoroughly of all the costs regarding your car throughout the year, which include the gas and oil, vehicle tools, maintenance and repairs, parking fees, license fees, and many more.
Pros and Cons of Standard Mileage Rate VS Actual Vehicle Expenses
To help you to get better insight into choosing two of the methods, here is the list of benefits and drawbacks of each method.
Standard Mileage Rate
Pros
- It is easier to use in order to gain a tax deduction
- It provides flexibility in case you want to switch between two methods (if it’s used in the car’s first year)
- It is simpler to track
Cons
- It may gain you less tax deduction compared actual expense method
Actual Expenses Method
Pros
- It may gain you a higher tax deduction, especially for larger and more expensive cars
- It may gain you a higher tax deduction if the number of your annual business miles is low
Cons
- It requires you to do a lot of work regarding expenses tracking record
- It provides no flexibility to switch between two methods (if it’s used in the car’s first year)
IRS Mileage Rate 2020 VS 2021
Started from January 1, 2021, the newly adjusted IRS mileage rate is officially applicable. It was announced in Notice 2021-02 on December 22, 2020. In general, the rates are slightly lower compared to the previous year of 2020.
Here are the details of IRS mileage rate 2021:
- For business purposes: $0.56 per mile
- For medical purposes: $0.16 per mile
- For charitable services: $0.14 per mile
- For moving (applicable only for active-duty Armed Forces): $0.17 per mile
In comparison, here are the details of IRS mileage rate 2020:
- For business purposes: $0.575 per mile
- For medical purposes: $0.17 per mile
- For charitable services: $0.14 per mile
- For moving (applicable only for active-duty Armed Forces): $0.17 per mile
Using Rates of IRS Mileage to Claim Mileage Deductions
To claim tax deduction for your vehicle expenses using mileage rates, then you need to itemize them on the tax return. You may need to provide some time to prepare the tax returns, as the details have to be reported in the 1040 Form and Schedule A, along with other complementing schedules of these forms.
For self-employed persons, the tax deduction regarding vehicle mileage for business trip purposes is claimed on Schedule C.
For electronic or online claims, you need to provide required information regarding the vehicle mileage during the process of interview and estimate the amount of deduction.
Frequently Asked Questions (FAQ) & Answers
How Much Does IRS Allow For Mileage?
The standard mileage rate set by IRS in 2021 for business is $0.56/mile; for medical or moving is $0.16/mile, and for charity is $0.14/mile.
Why Did The IRS Mileage Rate Go Down?
The standard mileage rate is set by IRS by using various fixed and variable costs of running cars. The reason why it is decreased is that there are changes in the costs of fuel and insurance.
Can A Company Pay Less Than The IRS Mileage Rate?
In general, the employers may pay their chosen mileage rate whether it is under or over the standard set by the IRS (except in the state of California). However, if the amount is less, then the difference might be deducted from the tax.
Does IRS Require Odometer Readings?
Odometer readings are not required by IRS for every single trip. The numbers that must be recorded for business purposes are time and date, the total distance, destination, and the business purpose of the drive.
Is The IRS Mileage Rate Mandatory?
No, there is actually no requirement of mileage rate to reimburse employees if they use personal vehicles for business purposes at the level of federal law. However, employers are required to provide reimbursement for employees for work-related spending by federal law.
How Much Should An Employer Pay For Mileage?
In order to claim a tax deduction on mileage rate, the taxpayer must keep track of their business trips’ miles (whether through notebooks or apps). The taxpayer then calculates the tax deduction according to the mileage rate by the end of the year.
Can I Switch From Actual Expenses To Standard Mileage?
You cannot switch from actual expenses to standard mileage if you use the actual expenses method in the first year of a car’s life. However, if you use the IRS standard mileage rate in the first year of a car’s life, you may change it later to the other alternative method in the upcoming years.
It is important to track the mileage rates of your vehicle in case you are going under tax audit. You are required to substantiate the tax deduction by providing the miles log that the vehicle has been driven. There are plenty of available ways to record the car’s mileage, from something basic and simple like using paper and pen, to use a convenient mobile app that you can download for free on your smart devices.
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