The IRS recently announced it will be increasing the standard mileage rate to 62.5 cents a mile for qualified business drivers for the second half of 2022. The adjustment reflects rising costs at the gas pumps this year.
Background
If you use a vehicle for business purposes, you generally have the option to deduct the actual expenses attributable to your business use. This includes expenses such as gas, oil, tires, insurance, repairs, licenses, and vehicle registration fees. In addition, you may claim a depreciation allowance for the vehicle, based on the percentage of business use. However, annual write-offs are subject to so-called luxury car limits, indexed annually.
For instance, the maximum first-year deduction allowed for a passenger car placed in service in 2022 is $19,200. (The usual $11,200 deduction is increased by $8,000 due to the “bonus depreciation” tax break under current law.) Therefore, if a taxpayer uses his or her car 90% for business in 2022, the deduction is limited to $17,280 (90% of $19,200).
But keeping track of every last vehicle-related expense can be hard work. Instead of deducting your actual expenses, you may be able to use an IRS-approved shortcut. With the standard mileage deduction, you do not have to account for all your actual expenses, although you still must record the mileage for each business trip, the date, the destinations, the names, and relationships of the business parties and the business purpose of the travel. The rate is adjusted annually by the IRS.
The standard mileage rate deduction is available to most taxpayers. However, it cannot be used if you:
for the vehicle in the past,
Adjustment
Initially, the IRS established a rate of 58.5 cents a business mile for 2022 (up just 2.5 cents from 56 cents a mile in 2021). But higher gas prices spurred calls for a mid-year adjustment. Although mid-year increases in the optional mileage rates are rare, there has been some precedent for this action. The last time the IRS made such an increase was in 2011 after gas prices soared.
Now, the IRS has announced that the standard rate will increase to 62.5 cents a mile — a jump of 4 cents a mile — effective July 1, 2022 (IRS Announcement 2022-13).
IRS Commissioner Chuck Rettig said, “The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices. We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses, and others who use this rate.”
Blended Rate for 2022
Here is an example to show how the “blended rate” for 2022 might work. For simplicity, assume that you drive 10,000 miles every six months on business. You also incur $1,000 in related tolls and parking fees during the year.
Based on the initial IRS rate, your cents-per-mile deduction for business driving for the first six months of 2022 is $5,850 (10,000 miles times 58.5 cents). However, you can now deduct $6,250 (10,000 miles times 62.5 cents) for business auto trips during the last six months of 2022. So, your total deduction for 2022 would be $13,100 ($5,850 plus $6,250 plus $1,000 tolls and parking fees).
Be aware that you still may fare better from a tax standpoint with the actual expense method than you do with the standard mileage rate, even after the latest increase.
Next Steps
To determine the best course of action regarding whether to use the actual expense method or the standard mileage rate, contact our tax experts regarding your particular circumstances.
Other Changes in IRS Announcement 2022-13
Besides the IRS-approved rate for business driving, the IRS announced that the new rate for deductible medical expenses for all taxpayers or moving expenses (available only for active-duty members of the military under current law) will be 22 cents for the remainder of 2022. This is an increase of 4 cents from the rate effective at the start of 2022 (18 cents per mile).
Important: The 14-cents-per-mile rate for charitable organizations remains unchanged. It is set by statute, so it can only be amended by Congress.
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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.
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