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May 31, 2018
IRS Raises FAVR Depreciation Limits, Clarifies Mileage Rates in Light of TCJA

The Internal Revenue Service (IRS) raised its maximum vehicle value thresholds for fixed and variable rate (FAVR) allowances to reflect the increases in depreciation limits made by the Tax Cuts and Jobs Act (TCJA) of 2017 (Pub. L. 115-97). The IRS also clarified the TCJA’s implications for using standard mileage rates in 2018.

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IRS Notice 2018-42, issued May 24, modifies earlier Notice 2018-03, which provided the annual updates to the standard mileage rates and maximum standard FAVR car and truck costs. The prior notice set a rate of 54.5 cents per mile for all miles of business driving that taxpayers were to use for purposes such as deducting unreimbursed employee travel expenses as a miscellaneous itemized deduction under Section 67 of the Internal Revenue Code.

However, the TCJA suspended all miscellaneous itemized deductions subject to the “floor” of 2 percent of adjusted gross income under Section 67, including unreimbursed travel expenses. Therefore, employees cannot use the business standard mileage rate (54.5 cents per mile for 2018, as indicated in Notice 2018-03) to claim an itemized deduction for unreimbursed travel expenses in tax years 2018 through 2025.

The standard rate apparently still may be used by employers to administer mileage allowance plans.

The IRS sets a lower mileage rate for using an automobile as part of a deductible move (18 cents per mile in 2018). The TCJA did not alter the rate but did curtail its use drastically, by suspending the deduction and exclusion for moving expenses (through 2025) in all but specified circumstances involving active military personnel. Except for such service members who are ordered to a new location, “the standard mileage rate is not applicable for the use of an automobile as part of a move occurring during the suspension,” the IRS stated in Notice 2018-42.

Effect on FAVR Plans

Notice 2018-03 identified a maximum standard automobile cost of $27,300 for passenger automobiles and $31,000 for trucks and vans to be used in computing the allowance under a FAVR plan. These plans, also known as “Runzheimer plans,” allow employers to reimburse employees for the use of their own or leased vehicles with a fixed periodic payment, plus a periodic cents-per-mile allowance.

TCJA Section 13202, however, increased the depreciation limitations for passenger vehicles placed in service after December 31, 2017. As a result, the maximum standard automobile cost is now $50,000 for passenger automobiles, as well as light-duty trucks and vans, placed in service after December 31, 2017, according to Notice 2018-42.

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