Did You Catch the Standard Mileage Rates for 2022 IRS Announcement?
Highlights:
- Important Considerations for 2022
- Switching Between the Actual Expense and Standard Mileage Rate Methods
- Employer Reimbursements
- Standard Mileage Rates for 2022
- Business, Charitable, Medical, and Moving Rates
- Employee Deductions Have Been Suspended
- Special Allowances for SUVs Have Been Suspended
- Bonus Depreciation Has Been Suspended
So many of us use our vehicles for work, medical purposes, moving house, and even for charitable causes. Just think for a second about all the driving you do in a week... Maybe your boss asks you to drive out of town to your company’s other office. Maybe you’re a support worker, and you take your client out for the day. Maybe you move for your new job working in the Forces. Or maybe you volunteer, delivering meals to the elderly in the evenings. (You go, little rock star!)
If you use your car for any of these purposes, then reading these updates to mileage rates will be important for you!
Last month, the Internal Revenue Service released the inflation-adjusted 2022 optional standard mileage rates, which are used to compute the deductible costs of using an automobile for business, charitable, medical, or moving purposes, as it does every year. You can read the full report from the IRS here at this link:
https://www.irs.gov/newsroom/irs-issues-standard-mileage-rates-for-2022
The regular mileage rates for the use of a car (or a van, pickup, or panel truck) will begin on Jan. 1, 2022, and will now be as follows:
- For commercial miles driven, the rate is 8.5 cents per mile (including a 26-cent-per-mile allocation for depreciation).
- 18 cents per mile driven for medical care or by an active member of the armed forces for relocation purposes, up from 56.0 cents in 2021.
- 14 cents per mile driven in support of philanthropic organisations, up from 16 cents in 2021.
The business standard mileage rate is calculated based on an annual analysis of the fixed and variable costs of owning and operating a vehicle. The rate for medical and moving expenses is calculated by the same study's variable costs. The fee for using a car to perform services for a nonprofit organization is set by statute (and can only be changed by Congressional action) and has been 14 cents per mile for more than 15 years.
Important Note: The 2022 rates are based on fuel costs in 2021. Given the likelihood of significantly higher gas prices in 2022, it may be prudent to consider moving to the actual expense method, or at the very least keeping note of actual expenses, such as gasoline costs, repairs, and maintenance, so that the option is open.
Rather than using the usual mileage rates, taxpayers can always calculate the actual expenditures of using their vehicle for business. In addition to the prospect of rising fuel prices, the 2017 Tax Cuts and Jobs Act's bonus depreciation and expanded depreciation caps for passenger cars may make employing the actual expense method worthwhile during the first year that the car is being used for business purposes.
The normal mileage rates, on the other hand, cannot be used if you have previously employed the actual method (using Sec. 179, bonus depreciation, and/or MACRS depreciation). This guideline is applied to each vehicle separately. Furthermore, the business standard mileage rate cannot be used for any vehicle that is hired out or for more than four vehicles at the same time.
Employer Reimbursement: When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee can prove the time, place, mileage, and purpose of employment-related business travel to the employer.
Employee business expenditures were eliminated as an itemized deduction under the Tax Cuts and Jobs Act, which took effect in 2018 and will last until 2025. As a result, employees may not deduct unreimbursed employment-related use of their automobiles, light trucks, or vans on their federal tax returns for those years. Self-employed people, on the other hand, can claim expenditures for personal automobiles used in their companies.
Heavy Sport Utility Vehicles (SUVs) will have faster write-offs: Many modern SUVs weigh more than 6,000 pounds and are thus exempt from the luxury auto depreciation limit rules; taxpayers who own these vehicles can take advantage of both the Section 179 expense deduction (up to $27,000) and bonus depreciation (the Section 179 deduction must be taken first) to generate a sizable first-year tax deduction. However, the vehicle's gross unloaded vehicle weight cannot exceed 14,000 pounds. Caution: Business automobiles have a 5-year life expectancy. A portion of the Section 179 expenditure deduction will be recovered and must be added back to income if the taxpayer sells the car before the conclusion of the 5-year period, as many do (SE income for self-employed individuals). It's important to think about the long-term consequences of deducting all or a major portion of the vehicle's cost under Section 179.
Consider Bonus Depreciation: As an alternative to the Section 179 deduction, consider bonus depreciation. A taxpayer can opt to deduct 100 percent of the cost of a new or used vehicle used for business in the first year it is put into business service under this provision. The luxury auto laws, on the other hand, set a maximum annual depreciation deduction, including bonus depreciation. For example, in 2021, the maximum depreciation deduction for a vehicle that was eligible for bonus depreciation was $18,200. If bonus depreciation isn't selected, the maximum amount is $10,200. Of course, if the vehicle is only used for business part of the time, just the business-use portion of the cost can be deducted.
After 2022, the deductible bonus depreciation percentage decreases by 20 percentage points per year until 2027, when no bonus depreciation would be allowed unless Congress extends the law.
It can be difficult to decide whether to claim bonus depreciation, Section 179, regular depreciation, or a combination of these techniques for a business car, or to use the usual mileage rate instead. That's why we're always happy to help you out with financial planning! Please contact our office if you have any questions about the appropriate options for deducting business use of your vehicle or the documents required.
