The tax-deductible cost allowed for operating a motor vehicle for business purposes will decrease five cents on Jan. 1 and officials for businesses say the new rate may be a mixed blessing.
The Internal Revenue Service announced recently that the standard rate for 2010 would be 50 cents a mile. The IRS said the new rate reflected generally lower costs of transportation compared to a year ago when it approved it at 55 cents a mile for 2009. Although gas prices are currently higher now than they were a year ago, the IRS averages the price of fuel over the course of a year and takes into account other costs of a vehicle when it determines the mileage allowance rate.
Businesses generally use the IRS rate for calculating not only their transportation expenses for tax purposes but also for how much they will reimburse employees for use of their personal vehicles.
“In some instances, the new rate can help employers and in some instances maybe not,” said Andrew Markowski, state director for the National Federation of Independent Business.
On the one hand, businesses may not have to pay employees as much next year for mileage, thereby reducing their expenses. But on the other hand, businesses could face a higher tax bill because of a lower deduction.
“From the small business perspective, particularly those who are self-employed, they can actually see a noticeable tax increase,” Markowski said. “But for any business, small or large, anyone who uses their vehicles and who drives a lot, they could see a noticeable difference.”
“Take the example of a sales person, someone going out on sales calls,” Markowski said. “They might drive X-number of thousands of miles a year and take the standard mileage rate instead of actual costs when they deduct. In 2009, they might have claimed a deduction of $11,000 and this year for example it might be $10,000. So assuming it’s the old tax rate, you’re going to end up paying more in taxes.”
Kia Murrell, assistant counsel for Connecticut Business & Industry Association, said that while some companies may save money by reimbursing their employees at a lower rate, the employees may not be as eager to go out and generate revenue for the business.
“Any change like this, no matter how small, will have an impact. These are the things that in their cumulative effect can be both positive and negative,” she said.
“There’s going to be an ebb and flow. There’s going to be a kind of dance that employers and employees do when mileage reimbursements rates decrease. You may be getting less out of your employees. When mileage is high, people don’t mind driving. They’ll say, ‘Oh, sure, I’ll take that call.’ Even when gas prices are high. You’d be surprised,” Murrell said.
“I think for the smaller businesses, the backbone of the economy, and majority of the businesses in the state they will feel the impact of employees’ behavior more,” she said. “If you’re a large corporation with a fleet of vehicles, you don’t have to pay attention to the mileage reimbursement as much as the guy who is delivering pizzas.”
Markowski said his organization does a survey of businesses nationwide every four years and in 2008 the cost of energy was cited as one of the top concerns.
“The number one problem of greatest concern was the cost of health insurance but the number two problem was energy costs, except electricity. So within that we’re talking basically fuel prices. And small business owners in general use energy for a variety of purposes but the primary energy cost for small firms is the operation of motor vehicles,” Markowski said.
“So anytime you see fluctuations in the price of gas, and in this case the IRS is catching up to it, it definitely has an impact on small business,” he said.
The IRS has also issued new mileage rates for calculating the deductible costs of operating a vehicle for charitable, medical or moving purposes.
For medical or moving purposes the new standard rate, which also takes effect Jan. 1, is 16.5 cents. For miles driven in service of charitable organizations the rate is 14 cents a mile.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
