October 15, 2003

ADVANCE COPY OF INTERNAL REVENUE BULLETIN ITEM
Attached is an advance copy of Rev. Proc. 2003-76, containing the
optional standard mileage rates for 2004 for business, charitable, medical
or moving purposes. It also revises the limitation on simultaneous use of
multiple vehicles to allow taxpayers using not more than four vehicles at
the same time for business purposes to use the standard mileage rate.
This Rev. Proc. will be in Internal Revenue Bulletin 2003-43, dated
October 27, 2003.
You may release this Rev. Proc. immediately

Communications Division

Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability. (Also Part I, Sections 62, 162, 170, 213, 217, 274,
1016; 1.62-2, 1.162-17, 1.170A-1, 1.213-1, 1.217-2, 1.274-5, 1.1016-3.)
Rev. Proc. 2003-76

SECTION 1. PURPOSE
This revenue procedure updates Rev. Proc. 2002-61, 2002-39 I.R.B. 1, by
providing optional standard mileage rates for employees, self-employed individuals, or
other taxpayers to use in computing the deductible costs of operating an automobile for
business, charitable, medical, or moving expense purposes. This revenue procedure
also provides rules under which the amount of ordinary and necessary expenses of
local travel or transportation away from home that are paid or incurred by an employee
will be deemed substantiated under ' 1.274-5 of the Income Tax Regulations if a payor
(the employer, its agent, or a third party) provides a mileage allowance under a
reimbursement or other expense allowance arrangement to pay for the expenses. Use
of a method of substantiation described in this revenue procedure is not mandatory and
a taxpayer may use actual allowable expenses if the taxpayer maintains adequate
records or other sufficient evidence for proper substantiation.

SECTION 2. SUMMARY OF STANDARD MILEAGE RATES
.01 Standard mileage rates.
(1) Business (section 5 below) 37.5 cents per mile
(2) Charitable (section 7 below) 14 cents per mile
(3) Medical and moving (section 7 below) 14 cents per mile

.02 Determination of standard mileage rates. The business, medical, and moving
standard mileage rates reflected in this revenue procedure are based on an annual
study of the fixed and variable costs of operating an automobile conducted on behalf of
the Internal Revenue Service by an independent contractor, and the charitable standard
mileage rate is provided in ' 170(i) of the Internal Revenue Code.

SECTION 3. BACKGROUND AND CHANGES
.01 Section 162(a) allows a deduction for all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business.
Under that provision, an employee or self-employed individual may deduct the cost of
operating an automobile to the extent that it is used in a trade or business. However,
under ' 262, no portion of the cost of operating an automobile that is attributable to
personal use is deductible.

.02 Section 274(d) provides, in part, that no deduction shall be allowed under
' 162 with respect to any listed property (as defined in ' 280F(d)(4) to include
passenger automobiles and any other property used as a means of transportation)
unless the taxpayer complies with certain substantiation requirements. Section 274(d)
further provides that regulations may prescribe that some or all of the substantiation
requirements do not apply to an expense that does not exceed an amount prescribed by
the regulations.

.03 Section 1.274-5(j), in part, grants the Commissioner of Internal Revenue the
authority to establish a method under which a taxpayer may use mileage rates to
substantiate, for purposes of ' 274(d), the amount of the ordinary and necessary
expenses of using a vehicle for local transportation and transportation to, from, and at
the destination while traveling away from home.

.04 Section 1.274-5(g), in part, grants the Commissioner the authority to
prescribe rules relating to mileage allowances for ordinary and necessary expenses of
using a vehicle for local transportation and transportation to, from, and at the destination
while traveling away from home. Pursuant to this grant of authority, the Commissioner
may prescribe rules under which the allowances, if in accordance with reasonable
business practice, will be regarded as (1) equivalent to substantiation, by adequate
records or other sufficient evidence, of the amount of the travel and transportation
expenses for purposes of ' 1.274-5(c), and (2) satisfying the requirements of an
adequate accounting to the employer of the amount of the expenses for purposes of
' 1.274-5(f).

.05 Section 62(a)(2)(A) allows an employee, in determining adjusted gross
income, a deduction for the expenses allowed by Part VI (' 161 and following),
subchapter B, chapter 1 of the Code, paid or incurred by the employee in connection
with the performance of services as an employee under a reimbursement or other
expense allowance arrangement with a payor.

.06 Section 62(c) provides that an arrangement will not be treated as a
reimbursement or other expense allowance arrangement for purposes of ' 62(a)(2)(A) if
it--
(1) does not require the employee to substantiate the expenses covered
by the arrangement to the payor, or
(2) provides the employee with the right to retain any amount in excess of
the substantiated expenses covered under the arrangement. Section 62(c) further
provides that the substantiation requirements described therein shall not apply to any
expense to the extent that, under the grant of regulatory authority prescribed in

' 274(d), the Commissioner has provided that substantiation is not required for the
expense.

.07 Under ' 1.62-2(c)(1), a reimbursement or other expense allowance
arrangement satisfies the requirements of ' 62(c) if it meets the requirements of
business connection, substantiation, and returning amounts in excess of expenses as
specified in the regulations. Section 1.62-2(e)(2) specifically provides that
substantiation of certain business expenses in accordance with rules prescribed under
the authority of ' 1.274-5(g) will be treated as substantiation of the amount of the
expenses for purposes of ' 1.62-2. Under ' 1.62-2(f)(2), the Commissioner may
prescribe rules under which an arrangement providing mileage allowances will be
treated as satisfying the requirement of returning amounts in excess of expenses, even
though the arrangement does not require the employee to return the portion of the
allowance that relates to miles of travel substantiated and that exceeds the amount of
the employee's expenses deemed substantiated pursuant to rules prescribed under
' 274(d), provided the allowance is reasonably calculated not to exceed the amount of
the employee's expenses or anticipated expenses and the employee is required to
return any portion of the allowance that relates to miles of travel not substantiated.

.08 Section 1.62-2(h)(2)(i)(B) provides that if a payor pays a mileage allowance
under an arrangement that meets the requirements of ' 1.62-2(c)(1), the portion, if any,
of the allowance that relates to miles of travel substantiated in accordance with
' 1.62-2(e), that exceeds the amount of the employee's expenses deemed
substantiated for the travel pursuant to rules prescribed under ' 274(d) and
' 1.274-5(g), and that the employee is not required to return, is subject to withholding
and payment of employment taxes. See '' 31.3121(a)-3, 31.3231(e)-1(a)(5),
31.3306(b)-2, and 31.3401(a)-4 of the Employment Tax Regulations. Because the
employee is not required to return this excess portion, the reasonable period of time
provisions of ' 1.62-2(g) (relating to the return of excess amounts) do not apply to this
excess portion.

.09 Under ' 1.62-2(h)(2)(i)(B)(4), the Commissioner may, in his or her discretion,
prescribe special rules regarding the timing of withholding and payment of employment
taxes on mileage allowances.

.10 Section 5.06(1) of this revenue procedure revises the limitation on
simultaneous use of multiple automobiles to allow a taxpayer using up to four vehicles
simultaneously to use the standard mileage rate.

SECTION 4. DEFINITIONS
.01 Standard mileage rate. The term "standard mileage rate" means the
applicable amount provided by the Service for optional use by employees or
self-employed individuals in computing the deductible costs of operating automobiles
(including vans, pickups, or panel trucks) they own or lease for business purposes, or
by taxpayers in computing the deductible costs of operating automobiles for charitable,
medical, or moving expense purposes.

.02 Transportation expenses. The term "transportation expenses" means the
expenses of operating an automobile for local travel or transportation away from home.

.03 Mileage allowance. The term "mileage allowance" means a payment under a
reimbursement or other expense allowance arrangement that meets the requirements
specified in ' 1.62-2(c)(1) and that is:
(1) paid with respect to the ordinary and necessary business expenses
incurred, or that the payor reasonably anticipates will be incurred, by an employee for
transportation expenses in connection with the performance of services as an employee
of the employer,
(2) reasonably calculated not to exceed the amount of the expenses or the
anticipated expenses, and
(3) paid at the applicable standard mileage rate, a flat rate or stated
schedule, or in accordance with any other Service-specified rate or schedule.

.04 Flat rate or stated schedule. A mileage allowance is paid at a flat rate or
stated schedule if it is provided on a uniform and objective basis with respect to the
expenses described in section 4.03 of this revenue procedure. The allowance may be
paid periodically at a fixed rate, at a cents-per-mile rate, at a variable rate based on a
stated schedule, at a rate that combines any of these rates, or on any other basis that is
consistently applied and in accordance with reasonable business practice. Thus, for
example, a periodic payment at a fixed rate to cover the fixed costs (including
depreciation (or lease payments), insurance, registration and license fees, and personal
property taxes) of driving an automobile in connection with the performance of services
as an employee of the employer, coupled with a periodic payment at a cents-per-mile
rate to cover the operating costs (including gasoline and all taxes thereon, oil, tires, and
routine maintenance and repairs) of using an automobile for those purposes, is an
allowance paid at a flat rate or stated schedule. Likewise, a periodic payment at a
variable rate based on a stated schedule for different locales to cover the costs of
driving an automobile in connection with the performance of services as an employee is
an allowance paid at a flat rate or stated schedule.

SECTION 5. BUSINESS STANDARD MILEAGE RATE
.01 In general. The standard mileage rate for transportation expenses is 37.5
cents per mile for all miles of use for business purposes. The Service will adjust the
business standard mileage rate (to the extent warranted) annually and prospectively.

.02 Use of the business standard mileage rate. A taxpayer may use the business
standard mileage rate with respect to an automobile that is either owned or leased by
the taxpayer. A taxpayer generally may deduct an amount equal to either the business
standard mileage rate times the number of business miles traveled or the actual costs
(both operating and fixed) paid or incurred by the taxpayer that are allocable to traveling
those business miles.

.03 Business standard mileage rate in lieu of operating and fixed costs. A
deduction using the standard mileage rate for business miles is computed on a yearly
basis and is in lieu of all operating and fixed costs of the automobile allocable to
business purposes (except as provided in section 9.06 of this revenue procedure).
Items such as depreciation (or lease payments), maintenance and repairs, tires,
gasoline (including all taxes thereon), oil, insurance, and license and registration fees
are included in operating and fixed costs for this purpose.

.04 Parking fees, tolls, interest, and taxes. Parking fees and tolls attributable to
use of the automobile for business purposes may be deducted as separate items.
Likewise, interest relating to the purchase of the automobile as well as state and local
personal property taxes may be deducted as separate items, but only to the extent
allowable under '' 163 or 164, respectively. Section 163(h)(2)(A) expressly provides
that interest is nondeductible personal interest if it is paid or accrued on indebtedness
properly allocable to the trade or business of performing services as an employee.
Section 164 expressly provides that state and local taxes that are paid or accrued by a
taxpayer in connection with an acquisition or disposition of property will be treated as
part of the cost of the acquired property or as a reduction in the amount realized on the
disposition of the property. If the automobile is operated less than 100 percent for
business purposes, an allocation is required to determine the business and nonbusiness
portion of the taxes and interest deduction allowable.

.05 Depreciation. For owned automobiles placed in service for business
purposes, and for which the business standard mileage rate has been used for any
year, depreciation will be considered to have been allowed at the rate of 14 cents per
mile for 2000, 15 cents per mile for 2001 and 2002, and 16 cents per mile for 2003 and
2004, for those years in which the business standard mileage rate was used. If actual
costs were used for one or more of those years, the rates above will not apply to any
year in which the costs were used. The depreciation described above will reduce the
basis of the automobile (but not below zero) in determining adjusted basis as required
by ' 1016.

.06 Limitations.
(1) The business standard mileage rate may not be used to compute the
deductible expenses of (a) automobiles used for hire, such as taxicabs, or (b) five or
more automobiles owned or leased by a taxpayer and used simultaneously (such as in
fleet operations).
(2) The business standard mileage rate may not be used to compute the
deductible business expenses of an automobile leased by a taxpayer unless the
taxpayer uses either the business standard mileage rate or a FAVR allowance (as
provided in section 8 of this revenue procedure) to compute the deductible business
expenses of the automobile for the entire lease period (including renewals). For a lease
commencing on or before December 31, 1997, the "entire lease period" means the
portion of the lease period (including renewals) remaining after that date.
(3) The business standard mileage rate may not be used to compute the
deductible expenses of an automobile for which the taxpayer has (a) claimed
depreciation using a method other than straight-line for its estimated useful life, (b)
claimed a ' 179 deduction, or (c) used the Accelerated Cost Recovery System (ACRS)
under former ' 168 or the Modified Accelerated Cost Recovery System (MACRS) under
current ' 168. By using the business standard mileage rate, the taxpayer has elected
to exclude the automobile (if owned) from MACRS pursuant to ' 168(f)(1). If, after
using the business standard mileage rate, the taxpayer uses actual costs, the taxpayer
must use straight-line depreciation for the automobile's remaining estimated useful life
(subject to the applicable depreciation deduction limitations under ' 280F).

(4) The business standard mileage rate and this revenue procedure may
not be used to compute the amount of the deductible automobile expenses of an
employee of the United States Postal Service incurred in performing services involving
the collection and delivery of mail on a rural route if the employee receives qualified
reimbursements (as defined in ' 162(o)) for the expenses. See ' 162(o) for the rules
that apply to these qualified reimbursements.

SECTION 6. RESERVED

SECTION 7. CHARITABLE, MEDICAL, AND MOVING STANDARD MILEAGE RATE
.01 Charitable. Section 170(i) provides a standard mileage rate of 14 cents per
mile for purposes of computing the charitable deduction for use of an automobile in
connection with rendering gratuitous services to a charitable organization under ' 170.

.02 Medical and moving. The standard mileage rate is 14 cents per mile for use
of an automobile (a) to obtain medical care described in § 213, or (b) as part of a move
for which the expenses are deductible under § 217. The Service will adjust the medical
and moving expense standard mileage rates (to the extent warranted) annually and
prospectively.

.03 Charitable, medical, or moving expense standard mileage rate in lieu of
operating expenses. A deduction computed using the applicable standard mileage rate
for charitable, medical, or moving expense miles is in lieu of all operating expenses
(including gasoline and oil) of the automobile allocable to those purposes. Costs for
items such as depreciation (or lease payments), insurance, and license and registration
fees are not deductible, and are not included in the standard mileage rates.

.04 Parking fees, tolls, interest, and taxes. Parking fees and tolls attributable to
the use of the automobile for charitable, medical, or moving expense purposes may be
deducted as separate items. Interest relating to the purchase of the automobile and
state and local personal property taxes are not deductible as charitable, medical, or
moving expenses, but they may be deducted as separate items to the extent allowable
under '' 163 or 164, respectively.

SECTION 8. FIXED AND VARIABLE RATE ALLOWANCE
.01 In general.
(1) The ordinary and necessary expenses paid or incurred by an
employee in driving an automobile owned or leased by the employee in connection with
the performance of services as an employee of the employer will be deemed
substantiated (in an amount determined under section 9 of this revenue procedure)
when a payor reimburses those expenses with a mileage allowance using a flat rate or
stated schedule that combines periodic fixed and variable rate payments that meet all
the requirements of section 8 of this revenue procedure (a FAVR allowance).
(2) The amount of a FAVR allowance must be based on data that (a) is
derived from the base locality, (b) reflects retail prices paid by consumers, and (c) is
reasonable and statistically defensible in approximating the actual expenses employees
receiving the allowance would incur as owners of the standard automobile.

.02 Definitions.
(1) FAVR allowance. A FAVR allowance includes periodic fixed payments
and periodic variable payments. A payor may maintain more than one FAVR
allowance. A FAVR allowance that uses the same payor, standard automobile (or an
automobile of the same make and model that is comparably equipped), retention period,
and business use percentage is considered one FAVR allowance, even though other
features of the allowance may vary. A FAVR allowance also includes any optional high
mileage payments; however, optional high mileage payments are included in the
employee's gross income, are reported as wages or other compensation on the
employee's Form W-2, and are subject to withholding and payment of employment
taxes when paid. See section 9.05 of this revenue procedure. An optional high mileage
payment covers the additional depreciation for a standard automobile attributable to
business miles driven and substantiated by the employee for a calendar year in excess
of the annual business mileage for that year. If an employee is covered by the FAVR
allowance for less than the entire calendar year, the annual business mileage may be
prorated on a monthly basis for purposes of the preceding sentence.

(2) Periodic fixed payment. A periodic fixed payment covers the projected
fixed costs (including depreciation (or lease payments), insurance, registration and
license fees, and personal property taxes) of driving the standard automobile in
connection with the performance of services as an employee of the employer in a base
locality, and must be paid at least quarterly. A periodic fixed payment may be computed
by (a) dividing the total projected fixed costs of the standard automobile for all years of
the retention period, determined at the beginning of the retention period, by the number
of periodic fixed payments in the retention period, and (b) multiplying the resulting
amount by the business use percentage.

(3) Periodic variable payment. A periodic variable payment covers the
projected operating costs (including gasoline and all taxes thereon, oil, tires, and routine
maintenance and repairs) of driving a standard automobile in connection with the
performance of services as an employee of the employer in a base locality, and must be
paid at least quarterly. The rate of a periodic variable payment for a computation period
may be computed by dividing the total projected operating costs for the standard
automobile for the computation period, determined at the beginning of the computation
period, by the computation period mileage. A computation period can be any period of
a year or less. Computation period mileage is the total mileage (business and personal)
a payor reasonably projects a standard automobile will be driven during a computation
period and equals the retention mileage divided by the number of computation periods
in the retention period. For each business mile substantiated by the employee for the
computation period, the periodic variable payment must be paid at a rate that does not
exceed the rate for that computation period.

(4) Base locality. A base locality is the particular geographic locality or
region of the United States in which the costs of driving an automobile in connection
with the performance of services as an employee of the employer are generally paid or
incurred by the employee. Thus, for purposes of determining the amount of fixed costs,
the base locality is generally the geographic locality or region in which the employee
resides. For purposes of determining the amount of operating costs, the base locality is
generally the geographic locality or region in which the employee drives the automobile
in connection with the performance of services as an employee of the employer.

(5) Standard automobile. A standard automobile is the automobile
selected by the payor on which a specific FAVR allowance is based.

(6) Standard automobile cost. The standard automobile cost for a
calendar year may not exceed 95 percent of the sum of (a) the retail dealer invoice cost
of the standard automobile in the base locality, and (b) state and local sales or use
taxes applicable on the purchase of the automobile. Further, the standard automobile
cost may not exceed $28,100.

(7) Annual mileage. Annual mileage is the total mileage (business and
personal) a payor reasonably projects a standard automobile will be driven during a
calendar year. Annual mileage equals the annual business mileage divided by the
business use percentage.

(8) Annual business mileage. Annual business mileage is the mileage a
payor reasonably projects a standard automobile will be driven by an employee in
connection with the performance of services as an employee of the employer during the
calendar year, but may not be less than 6,250 miles for a calendar year. Annual
business mileage equals the annual mileage multiplied by the business use percentage.

(9) Business use percentage. A business use percentage is determined
by dividing the annual business mileage by the annual mileage. The business use
percentage may not exceed 75 percent. In lieu of demonstrating the reasonableness of
the business use percentage based on records of total mileage and business mileage
driven by the employees annually, a payor may use a business use percentage that is
less than or equal to the following percentages for a FAVR allowance that is paid for the
following annual business mileage:

Annual business mileage Business use percentage
6,250 or more but less than 10,000 45 percent
10,000 or more but less than 15,000 55 percent
15,000 or more but less than 20,000 65 percent
20,000 or more 75 percent