Vehicle Depreciation: A Fixed Cost in FAVR Programs

What is Depreciation? Is it Considered a Fixed or Variable Cost in Fleet Management?

In fleet management, few concepts are as financially significant yet seemingly misunderstood as “depreciation”. Depreciation is the reduction in a vehicle’s value over time due to wear, tear, age, and market value. It’s the loss of motor vehicle value that occurs from the moment it is purchased and driven off the lot. 

Understanding Vehicle Depreciation

In traditional company-fleet models, depending on the vehicle ownership type, this cost is often actualized primarily in upfront purchasing or acquisition fees, partially regained with resale when the vehicle is remarketed.

However, in structured personal vehicle reimbursement programs like FAVR, depreciation is treated as a more consistent, controllable fixed cost. Instead of a company purchasing a car upfront and taking on all of the acquisition costs, organizations simply reimburse their employees for the business portion of their personal vehicle’s depreciation.

This means it is treated as a predictable, recurring component of vehicle ownership, distinct from more core operating costs like fuel and maintenance. For fleet managers and businesses that reimburse or are considering reimbursing drivers using personal vehicles, this difference is key.

Fixed vs. Variable Costs in Fleet Management

In most vehicle programs, costs are normally flagged as either fixed or variable. Fixed costs are predictable ownership expenses and do not fluctuate significantly based on how much a vehicle is used on a day-to-day basis. These costs include insurance, license fees, and registration costs. Variable costs, on the other hand, change constantly as mileage and usage increases. They include fuel, tire wear, and maintenance requirements.

Depreciation in FAVR Reimbursement Programs

Understanding how depreciation functions within cost structures is essential, especially when exploring a complementary personal vehicle reimbursement model like FAVR (Fixed and Variable Rate Reimbursement). 

“Depreciation,” specifically with natural vehicle age, occurs regardless of how often the vehicle is used. This can be forecasted as a more reliable fixed cost when paired with appropriate mileage estimates, over time. This classification is crucial in reimbursement models like FAVR, where employees are reimbursed based on both fixed and variable components of vehicle usage. Fixed reimbursements account for ownership costs (including depreciation), while variable reimbursements cover daily driving expenses, like fuel.

In a FAVR program, depreciation is calculated based on a vehicle profile designed based on business needs and geographic location. Reimbursement rates reflect this fixed depreciation cost, estimated over a standard annual mileage range, this differs by employee based on their estimated annual mileage band. If an employee drives more or less than this baseline, the mileage band will be adjusted annually for improved forecasting, but overall the depreciation component maintains reliably constant.

This structure provides several benefits. First, it ensures fair and tax-compliant reimbursements aligned with IRS guidelines. Second, it prevents overcompensating low-mileage drivers or undercompensating high-mileage ones.

Why Accurate Depreciation Matters

Inaccurate depreciation and resale estimates can skew a company’s cost planning. Underestimating depreciation may shortchange employees who shoulder real vehicle value loss. Overestimating it can inflate budgets. Tools and partners that offer market-based valuation data ensure businesses stay aligned with true business-required vehicle ownership costs.

Especially within a personal vehicle FAVR structure, businesses will see more cost efficiency by treating depreciation as a fixed, predictable cost. This provides better control. It also supports equitable driver payments by recognizing vehicle ownership as a real and recurring financial commitment, separate from daily operational business use.

In Reimbursement, Depreciation is a Reliable Fixed Cost 

Depreciation, as a fixed cost, plays a central role in making personal vehicle reimbursement models ideal for fleet managers as a complement to corporate fleets. In programs like FAVR, it is meticulously calculated and reimbursed separately from day-to-day variable expenses, offering a structured and compliant approach to covering vehicle ownership costs.

Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants nor agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.