The IRS recently announced it will be increasing the standard mileage rate for qualified business drivers for the second half of 2022.
The adjustment reflects rising costs at the gas pumps this year. It's accompanied by a hike in the standard mileage rate for medical expenses for all taxpayers and moving expenses for active-duty military personnel.
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. Another option: Instead of deducting your actual expenses, you may be able to use an IRS-approved short-cut (see "Qualifying for the Standard Mileage Rate" below). With the standard mileage deduction, you don't 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.
Qualifying for the Standard Mileage Rate
The standard mileage rate deduction is available to most taxpayers. However, it can't be used if you:
- Operate cars for hire (such as taxis and limos),
- Use five or more cars at a time (such as fleet operations),
- Have claimed an accelerated depreciation deduction for the vehicle in the past,
- Have taken a Section 179 deduction for the vehicle in the past,
- Have claimed actual expenses after 1997 for a vehicle that's leased, or
- Are a rural mail carrier who has received a qualified reimbursement.
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 midyear 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.
"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," said IRS Commissioner Chuck Rettig.
Blended Rate for 2022
Here's 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).
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's set by statute, so it can only be amended by Congress.
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. Consult with your CPA regarding your particular circumstances.