January 4, 2023

IRS Raises Standard Mileage Reimbursement Rate for 2023

Cities that use the IRS rate to reimburse employees and elected officials for mileage should be aware that on Jan. 1, 2023, the IRS raised the standard mileage reimbursement rate from 62.5 cents to 65.5 cents per mile. Employers can find the official rates in IRS Notice 2023-03.

Motus, a mobile workforce management software firm, has advised the IRS for more than 40 years about trends in business driving and helped form the annual rate, which is the amount an individual can deduct for business vehicle expenses. The increase in mileage rate is “due to some key factors and trends, including” the following:

  • Significantly higher fuel prices, which rose 49% for regular gasoline and 55% for diesel fuel over the six months ending June 30, 2022.
  • Surging vehicle acquisition costs due to ongoing supply chain constraints. The average sale price for a new vehicle grew by 11.9% year-over-year.
  • Considerable increases in vehicle ownership and maintenance expenses. Drivers spent an average of $10,728 on routine service, insurance, registration, and taxes in 2022, up from $9,666 in 2021.

The Commonwealth of Kentucky mileage rate for Jan. 1, 2023, through March 31, 2023, will be 44 cents per mile. This is a decrease from the 2022 fourth-quarter rate of 46 cents per mile. The Commonwealth of Kentucky Finance and Administration Cabinet provides new rates on Jan. 1, April 1, July 1, and Oct. 1 of each year. The Cabinet publishes the information on its State Employee Travel website. The reimbursement rate is determined using the American Automobile Association (AAA) Daily Fuel Gauge Report for Kentucky for regular unleaded gasoline, which AAA posts on its website.

Cities can use the Commonwealth of Kentucky or the IRS rate in their reimbursement policies, although most auditors prefer using the Commonwealth of Kentucky rate. According to KRS 64.710, cities cannot provide a lump sum expense account for the personal use of a vehicle or any other personal or official expense unless the allowance is provided by statute or approved by the General Assembly. This applies not only to vehicles but also to meals, uniforms, and other related expenses.

Cities should make sure their travel and expense reimbursement policies comply with state law and IRS requirements. Fringe benefits can be used to attract and retain employees; however, it is important to note that many of these benefits are subject to taxation. Always err on the side of caution and remember that a fringe benefit is taxable unless the law specifically excludes it. The IRS publishes a Local Government Fringe Benefit Guide each year to assist local governments in navigating this difficult area. The comprehensive guide covers the requirements for expenses related to travel, meals, lodging, uniforms, equipment, take-home vehicles, and volunteers, as well as many other areas. Cities should also work with their CPA or local auditor to answer any specific questions on processing fringe benefits for their employees. Failure to comply with the law may subject the employer to penalties.

For sample travel policies or more information on this or any personnel-related matters, contact KLC Personnel Services Attorney Michael Simon.