What is FAVR and why is it the future of vehicle reimbursement? 

FAVR stands for Fixed and Variable Rate reimbursement. At its core, it’s a reimbursement system that blends fixed and variable expenses associated with driving. The fixed rate includes aspects like depreciation, insurance, license and title fees, while variable rates account for items like gas, tires, and maintenance — essentially, all the costs drivers incur while using their personal vehicles for business-related tasks.

To read the complete guide to FAVR, check out this article: Fixed and Variable Rate (FAVR) Reimbursement Guide 

The Appeal of Personal Vehicles

This leads us to the key distinguishing feature of FAVR. Unlike the other vehicle programs, like company-owned or leased fleets, FAVR allows employee drivers to use their personal vehicles for work. 

This personal aspect of FAVR is pretty appealing to a lot of employees. When employees drive their personal vehicles for work, it can afford them a level of comfort, convenience, and familiarity they might otherwise not have in a fleet vehicle. Time flexibility, ease of mobility, and general satisfaction go up when an employee is driving their personal vehicle and not a company car. There are also quite a bit of cost-savings to be had for the employee for using their personal vehicle, which is one of the selling features of a good FAVR program. 

Tax Advantages of FAVR

FAVR, when utilized correctly, has a potential for tax-free reimbursement, provided certain IRS compliance criteria are met. This tax advantage is a win-win situation for both the employee driver, as well as the employer, translating to significant savings — up to 30%, in fact.

For all driving programs, business use and personal use have to be differentiated. When employees receive a company car, this is still the case. Employees and employers must figure out what value of the company car benefit is a personal benefit to the employee, and therefore taxable. When employees operate a fleet vehicle, they can either pay tax on the portion of the benefit that is for personal use, or pay a personal use chargeback to the company. 

For example, if the benefit value is deemed to be $1000, and the employee uses it for personal reasons 30% of the time, then they would be liable for tax on a $300 benefit. This accounts for the personal use of the company’s car, as a company car isn’t exclusively driven for business use. Since the use of a company car is considered a benefit, it’s considered tax-exempt by the IRS, so anything not job-related would not be tax-exempt. A FAVR program, however, requires only a fraction of this frustrating and confusing administrative and tax-related overhead.

FAVR programs offer tax-free mileage reimbursements, which is great for businesses. However, drivers must follow FAVR’s tax rules to stay on the right side of the law. These rules cover costs, vehicle age, and a 5,000-mile limit to ensure fair reimbursement and compliance. If a driver doesn’t meet these rules, their mileage reimbursement might end up being taxed later. Understanding FAVR taxes can help administrators create programs that save on taxes while staying compliant.

Taxable Income Assessment

The taxable income test is a pretty straightforward way to assess taxable income for FAVR mileage reimbursements. It’s conducted quarterly for FAVR drivers who aren’t tax compliant and for all 463 drivers. FAVR drivers who comply with tax rules don’t undergo this test—their reimbursements are always tax-free.

This test works by comparing a driver’s reimbursement to what they would have received at the IRS standard rate, known as their non-taxable limit. If a driver’s total reimbursement is lower than what they would have received at the standard rate, it’s considered non-taxable. But if it’s higher, the difference is taxable income, typically deducted from the upcoming pay cycle.

For example, the first driver might owe $236.19 in taxable income for the quarter, while the second driver wouldn’t owe anything. High-mileage drivers often don’t owe taxable income, even when they’re out of FAVR compliance, because the standard rate tends to over-reimburse them.

Tailoring Reimbursement to Geography

Geographic sensitivity is another impressive feature of a well-run FAVR plan. When implementing a FAVR program, mileage reimbursement rates are tailored to reflect the differing costs of driving across different locations within the United States. For example, an employee driving in Oakland, California, would receive a different mileage reimbursement rate than one driving in San Antonio, Texas. These variations are driven by factors such as regional differences in gas prices, local tax rates, insurance premiums, and other relevant expenses.

It’s important to account for these differences because there are so many different rules at so many different levels of government—from national IRS standard rates down to local tax bylaws. But why do reimbursement rates differ so significantly between locations? Take the example of gas prices: they tend to be notably cheaper along the Gulf Coast compared to other regions. 

Another example of price variations can be seen when looking at rural and urban pricing. Maintenance or repair costs (variable costs), like new tires, for example, are typically more affordable in rural communities than in urban centers. So when it comes to fair mileage reimbursement, FAVR is the ideal choice for employee drivers because a FAVR plan automatically accounts for these regional differences. 

To read more about FAVR geography, read this next: Geography of FAVR: how driver location determines rates | Cardata 

Benefits for Employers: Administrative Efficiency with FAVR

Implementing a FAVR program brings a world of benefits to employers, too. When it comes to administrative overhead, it’s a complete game-changer. With FAVR, there’s no need to grapple with endless receipts or manually calculate mileage reimbursements. The program takes care of all that, freeing up valuable time and resources that can be better spent on other business-related tasks. 

For employers, implementing an FAVR program offers the opportunity to provide a cost-effective and fair mileage reimbursement plan while minimizing tax liabilities. On the other hand, employees benefit from receiving reimbursement that accurately reflects the expenses they incur based on their location and driving habits.

Incentives for Transitioning: Cost Savings with FAVR

Additionally, the cost savings are an incentive for businesses considering transitioning to FAVR. By accurately reimbursing employees for their driving expenses, companies don’t need to worry about overpaying or underpaying for mileage, as is commonly the case with car allowances or cents-per-mile programs. It’s a win-win situation – happier employees and a healthier bottom line.

FAVR represents a modern and practical approach to employee vehicle reimbursement programs. By embracing FAVR, companies can streamline their reimbursement processes, enhance employee satisfaction, and ultimately find greater value for all stakeholders involved.

Conclusion

In summary, FAVR can be described as a mileage reimbursement program that covers both fixed and variable expenses associated with driving personal vehicles for work purposes. Its tax-free nature, coupled with its geographic sensitivity and equitable approach to reimbursement, makes it an intuitive and progressive option for both employers and employee drivers alike.