AUTO UPDATE FOR EMPLOYEES, EMPLOYERS AND SELF-EMPLOYED

The IRS just issued an announcement that they have increased the optional standard mileage rates for the final six months of 2026 in response to rising fuel costs. Effective 7/1/26, the standard rate for the business use of a vehicle will be 76 cents per mile, an increase from the first half of the year. The new rate for deductible medical or moving expenses is 23.5 cents per mile. The charitable mileage rate, which is set by statute, is not affected by inflation and remains unchanged at 14 cents per mile. These revised rates apply to deductible transportation expenses paid or incurred on or after 7/1/26. Employers must apply the new rates to mileage allowances for travel occurring on or after the effective date, creating a split-year framework for reimbursements under accountable plans.

With gas prices out of sight, we thought it worthwhile to update our auto email alert from earlier in the year you should have received from us.

The business rate is based on an annual study of fixed and variable costs, while the medical and moving rates consider only variable costs.  These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.

The optional standard rate may be used by taxpayers to decrease the record keeping burden associated with tracking actual automobile expenses. You would compute the permitted deduction by multiplying the business miles driven during the year by the standard mileage rate. Parking and tolls, at least the business portion, are in addition to the standard mileage rate. Taxpayers can use the standard mileage rate but generally must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.

The deduction is allowed only for that part of the expenses that are attributable to business use (sorry, commuting is considered personal use). Yep, an employee using it for business qualifies (even if it’s a certain curly haired CPA’s automatic Porsche Boxter). One can always substantiate such auto costs by keeping exact records of expenses such as gas, repairs, tires, licenses, insurance, oil, car lease payments, auto depreciation, oil and other such maintenance costs allocable to the business usage by the employee or self-employed person. 

This business standard mileage rate can be used for leased or owned autos, but where the particular owned car uses the standard mileage rate, depreciation is assumed to be at a set per mile amount for those years in which the business standard mileage rate was used. The portion of the business standard mileage rate treated as depreciation is 35 cents per mile for 2026, 33 cents per mile for 2025, 30 cents per mile for 2024, 28 cents per mile for 2023, 26 cents per mile for 2022 and 26 cents per mile for 2021. Abo and Company professionals, as tax preparers, need to know this information since the depreciation described reduces the basis of the car in determining gain or loss when disposed of later on.

An employer’s reimbursements to employees for properly documented business expenses are not subject to payroll taxes, nor must such reimbursements be reported on the employee’s tax return. This tax-free treatment applies in a mileage allowance, but only if the reimbursement rate is no more than the IRS-approved standard mileage rate. If employers choose to reimburse employees at a higher rate, the excess over the standard rate per mile is treated as additional income to the employee, subject to income and payroll taxes. Yep – again, often a bookkeeping nightmare.

Under the Tax Cuts and Jobs Act, since 2017, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee business expenses. We recommend that you contact us and secure our previous email alert on Accountable Plans entitled “EMPLOYERS AND EMPLOYEES – ABO AND COMPANY SUGGESTS GETTING A BIGGER BANG WITH EMPLOYEE REIMBURSEMENT BUCKS”.

One question we at Abo and Company get asked a lot, as we’re sure is the case with many of our tax-preparer colleagues, is about interest incurred on a car loan. As per our auto memo last year, interest paid by an employee on their auto loan was considered nondeductible personal interest. A self-employed taxpayer could, however, deduct the business portion of such interest paid as a business expense, but the remaining non-business portion is considered nondeductible personal interest. Well, there are new rules for deducting car loan interest. For tax years 2025 through 2028, individuals may deduct up to $10,000 per year in interest paid on loans for new, American-made passenger vehicles purchased for personal use. The loan must be initiated after December 31, 2024, and the vehicle must have its final assembly in the United States. Used vehicles, business-use vehicles, and leases do not qualify. Also, the vehicle must be expected to be used for personal purposes over 50% of the time when the loan is issued. The deduction is available whether you take the standard deduction or itemize but phases out for taxpayers with modified adjusted gross income (MAGI) over $100,000 ($200,000 for joint filers).