Mileage Reimbursement – The True Cost Of Running A Car

Mileage Reimbursement

If you are driving for business, you are probably aware that the IRS mileage reimbursement rate for 2016 is 54 cents per mile. But what factors influence this figure?

To calculate the standard mileage rate, the IRS conducts an annual study of both the fixed and the variable costs of operating an automobile.┬áThe obvious daily cost of driving a car is fuel. However, the mileage reimbursement rate takes into account more than just the fuel cost, it’s supposed to cover all your auto expenses.

The IRS doesn’t details how it comes to the 54 cents figure. But luckily, the AAA conducts a similar research, which breaks down the costs of owning and operating a car. Below are the average costs per mile for three sedan categories: small, medium and large.

Miles per year 10,000 15,000 20,000
Small sedan 58.2 cents 44.9 cents 38.0 cents
Medium sedan 75.9 cents 58.1 cents 49.0 cents
Large sedan 93.3 cents 71.0 cents 59.5 cents

Let’s have a look at the individual costs and how they add up. You will quickly realize the importance of accurately tracking your mileage.

Finance charges

Very few people will buy a car outright; instead most will take a loan. The calculation here is based on a five-year loan with a 10% down payment. According to the survey, the finance charge for a small car is $473 per year, while it is $675 for a medium sedan and $858 for a large one.

Maintenance

Maintenance is one of the most obvious costs. The study supposes the user conducts routine maintenance as specified by the manufacturer. The cost of maintenance for a small car is 4.68 cents per mile. It is 5.20 cents and 5.46 cents for a medium and a large sedan respectively.

It appears many people skip the visit to the auto shop. That would reduce the bill, however, not getting to a business meeting with a client because the car breaks down wouldn’t look very professional.

Depreciation

Unlike a house or a painting, a car is an asset that loses value over time due to wear and tear. To account for the reduction is value, the research calculated the difference between the price of the new car and its estimated market value five years later. As you can expect depreciation is the largest ownership expense.

The depreciation of a small car, based on 15,000 miles per year, would be $2,515. The amount is $3,687 for a medium car and $4,759 for a large one.

Insurance

Insurance is a difficult cost to estimate because it depends on many factors such as the age of the driver, their driving habits, the city where they live and the profile of the insurance provider.

Based on a typical driver: middle aged, living in a small town and driving 3 to 10 miles per day, the estimated cost of the policy for a small sedan is $1071 per year. It rises to $1,106 for a medium car and $1,167 for a large one. Of course this amount will be higher for a young driver living in a large city.

License, registration and taxes

Taxes and registration fees are often overlooked when calculating the on-going cost of running a car. The cost includes fees payable at time of purchase as well as fees due each year to keep the vehicle licensed and registered. All these costs add up pretty quickly. For a small car, the cost is $489 per year while it is $671 and $836 for a medium and large vehicles respectively.

Fuel

Fuel consumption is probably the easiest cost to track, provided you don’t mix up personal and business trips. Based on a $2.855 per gallon, the average fuel cost of operating a small car is 9.18 cents per mile while it is 10.87 cents for a medium car and 13.58 cents per mile for a large sedan.

As you can see from the table above, the cost per mile decreases as you drive more miles. You may agree it would be more interesting and fair if the IRS invents a formula where the standard mileage reimbursement rate depends on the number of miles driven per year rather than a one rate for all business travelers.

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