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September 18, 2005 -- With the significant increases in gas prices, have the standard mileage rates increased?

Yes. In response to the recent dramatic gas price increases, the IRS has announced that the optional standard mileage rate has increased 8¢ to 48.5¢ a mile for all business miles driven between September 1 and December 31, 2005, up from 40.5¢ for the first eight months of 2005. The rate for computing deductible medical or moving expenses between September 1 and December 31, 2005 is boosted to 22¢ a mile up from 15¢ for the first eight months of 2005.

The mileage allowance deduction replaces separate deductions for lease payments, depreciation for a purchased car, maintenance, repairs, tires, gas, oil, insurance, and license and registration fees. The taxpayer may, however, claim separate deductions for parking fees and tolls connected to business driving.

The standard mileage rate may not be used for a purchased auto if it was previously depreciated using a method other than straight-line for its estimated useful life or a Code Section 179 expensing deduction was claimed for the auto. In addition, the standard mileage rate may not be used for a purchased auto if the taxpayer depreciated it using Modified Accelerated Cost Recovery System (MACRS) under Code Section 168 or the vehicle is used for hire, such as a taxicab. Also, the standard mileage rate cannot be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously, such as in fleet operations.

A taxpayer may use the mileage allowance method for a leased auto only if he uses that method or a Fixed and Variable Rate (FAVR) allowance method for the entire lease period, including renewals. If the lease period began before 1998, this rule applies only for the post 1997 portion of the lease period, including renewals.

Although the IRS normally updates the mileage rates once a year in the fall for the next calendar year, the IRS said that it made this special adjustment for the final months of 2005 in recognition of recent gasoline price increases. IRS Commissioner Mark W. Everson said that with many predicting a decline in gas prices over coming months, the IRS will hold off on setting the 2006 rate until closer to January. Everson noted that next year’s rate could be lower than 48.5¢, adding “While gasoline is a major factor in the mileage figure, other items enter into the calculation of mileage rates, such as the price of new vehicles and insurance.”

Employers that require employees to supply their own autos may reimburse them at a rate that does not exceed 48.5¢ a mile for employment-connected business mileage during the last four months of 2005, whether the autos are owned or leased. The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip. Additionally, an employee’s personal use of lower-priced company autos during the last four months of 2005 may be valued at 48.5¢ per mile if certain conditions are met.

The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14¢ a mile.

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