Lessons From the New IRS Mileage Rates

Each year the IRS updates its allowable mileage rates.  It recently announced the following rates for 2023:

65.5 cents per mile for business use;

22 cents per mile for medical purposes; and

14 cents per mile for charitable purposes.

The latter two rates are unchanged from 2022. The new business mileage rate has increased by three cents per mile from the previous year.  The IRS claims the business rate is based on the fixed and variable costs of operating a vehicle and the medical reimbursement rate is based only on variable costs. Finally, the charitable contribution rates are determined by statute.  How do the new rates impact NFP managers? 

Right off the bat, it means costs will rise.  If your employees are using their vehicles for work purposes and you reimburse them at the IRS mileage rate you will need to pay them three cents per mile more than you did last year. However, that is not the real impact of these rates. The true impact may be far more subtle.  

Let’s dig beneath the surface of these numbers.  If we accept the IRS computations at face value, 22 cents per mile is the variable cost ( fuel, maintenance, etc.) of operating a vehicle. An additional 43.5 cents per mile then is the fixed cost of vehicle operation.  In short, the fixed costs or overhead application rate is about twice that of the variable cost. The largest component of the fixed cost is the depreciation of the car, which one source claims to be about 40% of the entire cost of operating the vehicle. 

This is just one example of a trend in the American economy. The percentage of fixed to total costs of providing products and services is rising. This is no less true in the NFP sector than in other industries.  There are many reasons for this, including the expanded use and cost of technology to conserve on personnel costs by improving productivity. NFP managers need to keep this principle in mind when they are applying for grants and costing out services.  Yes, we are not in the business of making a profit, but we do need cash flow to keep the doors open, provide a living wage for our employees, and fulfill the organization’s vision and mission.  Not taking into consideration fixed costs is a losing proposition in the long run and will lead to the eventual demise of the organization. Some of you may respond by saying many funders will not provide for overhead. My answer to that is to take a look at activity based costing, a topic previously discussed in this blog…

The second takeaway is the impact on volunteers and donors.  The charitable mileage rate is about two-thirds of the variable cost of operating a vehicle. So, the volunteer who can itemize on their tax returns (admittedly, few and far between these days because of the higher standard deduction on the federal income tax return) actually “lose” money driving to your facility to volunteer.  The deductible amount of charitable driving doesn’t even cover the variable cost of operating the car. Using this math, it might be better for  the volunteer to simply write a check that is completely deductible than to drive down to your facility and volunteer.   Obviously, this is not a perfect substitute for actual volunteering, but this problem is something NFP managers need to be aware of.  Some strategies for helping defray costs would be to allow volunteers to do as much as possible remotely so they can “bunch” their physical travel time to minimize expenses and to consider paying small stipends for actual time spent on premises. This will increase costs but the stipend says yes, we know it costs money for you to come here but we want to show our appreciation. 

It is troubling that Congress and the states are  so stingy with the charitable mileage rates.  In two scant years (2025) the Trump era tax changes will lapse and the higher standard deduction will disappear.  If this is the case, more and more people will begin itemizing again. Consider contacting your federal and state legislators to push for higher deductible mileage rates. The NFP  sector does a great job helping out those in need. It is also vital to the health of the economy but very few people talk about this. It is time we did. Let our legislators know how much the charitable contribution deduction and the charitable mileage deductions mean to our volunteers and donors.  Perhaps this will increase the volunteer participation in NFP organizations. 

Cost of operating a vehicle: https://companymileage.com/howmileageratedetermined/