The IRS Standard Rate is a cents-per-mile reimbursement model, paying an IRS-determined flat rate for miles driven. It suffers from many of the same flaws as flat rate allowances, although it does have the advantage of non-taxable reimbursements.  It is also easy to administer and explain, and because reimbursements are based on mileage it takes some of the “randomness” out of a reimbursement program.

Whether a business reimburses with the IRS rate or a rate of their choice, a cents-per-mile rate does not consider:

• fuel – daily movement of fuel prices,
• regions – expense differentials in taxes, insurance and licensing,
• type of vehicle – a verifiable standard on which to establish a cents-per-mile figure will vary significantly form a Honda Civic to a Chevrolet Impala to a Ford F-150 pickup truck.

The IRS Rate is typically determined once a year, and in rare cases, a revised rate may be published part way through the year. Regardless of fluctuating fuel prices and regional disparity the rate remains static across the country until the next amendment.

Consider two drivers who both put 10,000 miles on their vehicle, but one lives in Los Angeles and the other in Boston.  Even though their costs are significantly different, they each get the same reimbursement, the same cents-per-mile.

Since the IRS Rate blends together fixed and operating costs, the fixed costs are not accounted for accurately.  The costs of purchasing, registering and insuring a vehicle need to be paid in full regardless of the number of miles driven.  As a result, at lower annual mileages, the IRS rate underpays drivers. At higher mileages the rate overpays so significantly that in some cases a new vehicle could be purchased each year.  Using the 2012 rate of 55.5¢ per mile, a 6,000 mile a year driver could receive $3,330 and the 45,000 mile a year road warrior would get $24,975.  Neither amount is close to their actual costs. 

A cents-per-mile program is known in the industry as “driving for dollars”. It may not be an efficient use of time to travel a few hours and many miles out of town but it can make up a month-end cash flow shortfall.

The 2012 IRS rate is 55.5¢ per mile.

To learn more about trading in your cents-per-mile reimbursement program for a more efficient and representative vehicle reimbursement program, please visit the following....