It’s a new year, which means the IRS has issued a new optional standard deduction rate for automotive mileage. It’s 58 cents per mile driven for business purposes — a 3.5-cent increase over last year and the second-largest annual hike in the past decade.
Because most experts predict gas prices to drop and inflation to hold steady in 2019, at first glance the sharp increase seems misaligned with economic forecasts. Essentially, the IRS is predicting the cost of owning and maintaining a car to increase 6% just as two headline inputs are expected to either decrease or hold steady.
But the IRS mileage rate is not a simple projection of gas prices and consumer costs. Actually, it’s a fascinating composite index that unifies diverse data from across the economy.
To get to the bottom of the 2019 mileage rate, we went directly to studies published by Motus, the third-party contractor that advises the IRS on deductible rates for automotive expenses. In its research we found a surprising number of macro trends predicted to influence the cost of owning and operating a vehicle in 2019. Here are three of the most interesting.
Heading into 2019, many economic forecasters have predicted an overall drop in gas prices. Motus disagrees, however.
As is often the case with the price of oil, the only guarantee Motus sees is volatility. “Analysts have gone from predicting an unprecedented surge in fuel prices in 2019 to depressed prices from a market oversupply in a short and unpredictable seven-week span,” the company writes in its 2019 Fuel Trends Report.
As it stands, Motus expects a 7% fuel price increase between January and June 2019 — from a national average of $2.37 to $2.52 — as summer driving season approaches. But a big question mark looms in the geopolitical arena.
In November 2018, the U.S. government imposed sanctions on Iran, one of the world’s top oil producers. To stave off a potentially disastrous shortage of crude oil, the United States extended sanctions waivers to Iran’s biggest oil customers for 180 days and encouraged other oil producers to ramp up production.
When those waivers expire in May, Iran’s customers will need to choose between buying the country’s oil and doing business with the United States. “Concerns over an abrupt falloff in crude supply could drive a short-term price spike,” worry the Motus analysts, who also fear U.S. sanctions against other oil producers in 2019.
To be sure, stability in the oil market this year is just as possible as disruption. But to price in the volatility of this essential commodity, the analysts recommend budgeting for an increase in the cost of fuel.
Fuel comprises less than a quarter of a vehicle’s annual operating expenses; about 37% of the total cost is depreciation. And in 2019, depreciation will increase — partly thanks to ridesharing.
Apps like Uber, Lyft, and Via have changed the way travelers get around. Arguably no industry has been hit harder than car rental. As rental companies cull their fleets to meet softer demand, they unload extra cars onto the secondary market, resulting in a glut of used vehicles.
This surplus puts downward pressure on the resale value of every car on the road, which conversely increases its depreciation.
“In business vehicle programs, residual value is a major contributor to capital costs, working as a handshake with the upfront costs,” write the Motus analysts. The value of the asset itself is an important budgetary consideration for vehicle owners, and the higher deductible rate in 2019 reflects the accelerated write-downs.
Over the past few years, insurance companies have suffered significantly from natural disasters. In auto insurance especially, policy-writers have dealt with years of unprofitability due to weather-related claims. With some of the costliest-ever storms and fires in the recent past, there’s no reason to improve that outlook in 2019.
Natural disasters aren’t the only cause of losses in the insurance industry, but as Geico noted in its 2017 annual report, “Extraordinary weather conditions have a significant effect upon the frequency or severity of automobile claims.” To offset these losses, auto insurance premiums will rise for both commercial and corporate customers. As such, the IRS mileage deduction rate will rise along with them.
Keep in mind that under the Tax Cuts and Jobs Act of 2017, employees cannot use the standard mileage rate to claim an itemized deduction for unreimbursed employee travel expenses. This new tax treatment of the mileage deduction will be in place through 2025.
Some of the factors in the IRS’s mileage reimbursement rate are not revealed to the public. Others are interesting. (Did you know that computerized vehicles have caused the cost of maintenance to rise? That’s factored in as well.)
It makes sense that the cost of auto ownership and use reflects macro-scale trends in the global economy. In turbulent times, with disruptions predictable in the price of oil, used vehicles, and insurance, the IRS has opted to set its annual deduction at a generous rate to price in that volatility.