Effective January 1st, 2007, the IRS business mileage rate rises to 48.5 cents, up from 44.5 cents.

Whether four cents are a big deal or small potatoes depends on whether your company reimburses employees, including yourself, for lots of miles. But strategically it’s a big deal because this 9% annual increase is one of many that contribute to expense creep – the steady erosion of profit from lots of “little” cost increases.

Fight expense creep: exercise your options. For instance, the IRS mileage rate is the maximum tax deduction your firm can take for business miles, but you don’t have to reimburse employees at the maximum rate. You can choose 45 cents, 40 cents, 30 cents – you name it. Employees might grumble a little of course because it affects their compensation. And if the owner is driving those miles, she’s leaving money on the table: better to maximize this tax deduction opportunity.

Another option is not to use the mileage method at all. In fact, you can’t use the mileage method for auto expenses if your company owns and depreciates the vehicle. In this case you deduct the actual expenses – gas, maintenance, registration, insurance, etc. Which auto method best serves your business is a good topic for annual tax planning with your CPA.

Remember, when the IRS business mileage rate changes:

• Revise employee expense reports if your firm will reimburse miles at a higher rate
• Reimburse at lower rates any miles driven for medical, moving and charitable purposes.

For the IRS announcement, please click here:
http://www.irs.gov/newsroom/article/0,,id=163828,00.html