What it means
When someone uses their own car for work, there are many costs involved, such as fuel, repairs, insurance, tyres and wear. Keeping receipts for all of these is a chore.
The standard mileage rate lets you multiply business miles by a set amount per mile and claim or reimburse that figure instead. In the United States the IRS publishes the rate each year, with different rates for business use, medical travel and charitable driving.
Other countries have similar schemes, such as approved mileage rates in the UK. Because the rates change, always use the one published for the relevant year and purpose.
Employers use the rate to reimburse staff. If a company pays employees up to the official rate for business miles under an accountable arrangement, the payments are generally not treated as taxable pay.
Paying more than the rate can create a taxable amount, and paying less can leave staff out of pocket unless they claim the difference where the law allows. Self-employed people and small business owners can use it as a deduction on their tax returns, subject to rules.
To qualify, they must keep a record of each trip, including the date, destination, purpose and miles driven. Commuting between home and a regular place of work is generally not business mileage.
There is a choice between this method and the actual expense method, which adds up the real costs of running the car. For a cheap, efficient vehicle, the standard rate may exceed true costs and give a bigger deduction, while for an expensive vehicle with high costs it can be less generous.
Many tax systems restrict switching methods after the first year, so it pays to think ahead. Finally, remember that the rate is a ceiling for tax-free reimbursement and not a rule about what a business must pay.
Companies can set their own policies, provided they stay within tax rules. A clear written policy avoids disputes and keeps records tidy.
In practice
Real-world examples.
Example
A consultant drives 6,000 business miles to client sites. He keeps a mileage log in a phone app and multiplies the miles by the published rate. The result is his mileage deduction for the year. He also notes the total on his quarterly tax estimate so that the deduction is reflected in what he pays during the year, not only at filing time.
Example
A company reimburses its field engineers at the official rate for each business mile. Finance processes the claims monthly using a spreadsheet that checks each trip against the log. Because the payments stay within the official rate, they are not added to taxable pay.
Example
A volunteer drives 400 miles for a charity and wants to claim a deduction. She finds that the charitable rate is different from the business rate. She uses the correct rate and keeps records of the trips. Her tax adviser reminds her that the charitable rate is often fixed by law, so it does not rise or fall with the actual cost of fuel.
Formula
Calculation
Deduction or reimbursement = Business miles driven x Standard mileage rate
Suppose, for illustration, that the rate set for the year is $0.60 per mile. A sales representative drives 8,000 business miles in the year using her own car. The reimbursement or deduction is 8,000 x $0.60 = $4,800. If her actual documented car costs allocated to business use were $4,300, the standard rate would give her $500 more than the actual expense method. The $0.60 rate here is an assumption, not a current published figure.Case study
Seen in the real world.
Summit Home Services is a fictional company with 15 technicians who use their own vehicles. At first it paid a flat monthly car allowance, and some staff complained that it did not cover the miles they drove. This is an illustrative scenario, not a real company.
The finance manager switched to mileage-based reimbursement at the official rate, with a simple app to record trips. Staff were paid in line with the actual distance they drove, and the company showed that payments were tax-compliant. Total reimbursements rose by about 10% in the first year, but complaints fell and record-keeping improved. The finance manager also found that the mileage data helped her spot routes where jobs were poorly scheduled, which later reduced travel.
Watch out
Common mistakes.
- Claiming commuting miles as business miles. Travel between home and a regular workplace is generally not deductible.
- Skipping the mileage log. Without a record of dates, purposes and distances, a claim can be refused.
- Using an old rate. The rate changes, so use the one published for the right year and purpose.
Questions
People also ask.
Can I also deduct fuel if I use the standard rate?
Generally no, because the rate already includes fuel and other running costs, though parking and tolls can often be claimed separately.
Who sets the standard mileage rate?
The tax authority of each country sets it, and in the United States that is the IRS.
Is the standard rate always better than actual expenses?
Not always, so compare both methods in the first year, because switching later may be restricted.
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