How to Build a FAVR Program for Your Company

Introduction

Entering into the world of vehicle reimbursement programs may initially feel overwhelming, but that doesn’t have to be the case – especially if you choose a dedicated provider with the know-how and resources needed to efficiently facilitate the process. 

Gone are the days of mismanaged time and focus, spent solely on keeping your vehicles running smoothly. You can achieve so much more with the help of a trusted service provider. Whether you’re switching from a fleet system or are just starting out with a brand-new mobile workforce, the best part is that getting set up with FAVR is easier than you think. In this article, we’ll explore the key steps involved in establishing a vehicle reimbursement program.

Cardata provides comprehensive management of your tax-free program, to ensure that you and your employees are on a smooth journey toward success. Indeed, partnering with a reliable service provider is essential if you want to free yourself from the burden of heavy administrative tasks. Outsourcing permits workers to redirect their efforts toward essential business functions. In other words, it empowers your team to focus on only the most important tasks, namely ones that drive your organization’s growth. 

So let’s dive into how you can set up a great program, together with your partner.

Step 1: Choosing the ideal vehicle category

The foundation of any effective vehicle reimbursement program lies in selecting a standard vehicle category. As the bedrock for the entire FAVR plan, it’s vital to remember that this decision carries a lot of weight. Drivers are granted the freedom to choose the vehicle type that aligns with their individual needs, while the company bases their reimbursements on program standard vehicle. 

Given that all vehicles have unique fuel and repair costs, as well as insurance and depreciation rates, having a program standard vehicle is vital to keeping down the complexity of your program. Employees nevertheless retain the autonomy to select the vehicle they want to drive. Meanwhile, the company’s sole responsibility lies in reimbursing the chosen vehicle category. This approach strikes a harmonious balance, enabling employees to exercise preference while providing the company with a streamlined reimbursement process.

Step 2: Determining the business use percentage (BUP)

To accurately calculate reimbursements, it’s crucial to establish the business use percentage, representing the average time the vehicle will be utilized for business purposes within a given week. A recommended starting point, based on IRS-compliant plans, is 71.4 percent, accounting for typical Monday to Friday driving, or five out of seven days. This percentage serves as a guide, ensuring fair and accurate reimbursement calculations while adhering to tax regulations. Abiding by the BUP set out will help keep reimbursements as close to a tax-free status as possible. Striking the right balance between business and personal use ensures a transparent and effective program. 

Read all about vehicle business use percentage.

Step 3: Factoring in location and territory

Recognizing the uniqueness of each employee on the road, it’s helpful to consider their location and territory. An employee’s address plays a pivotal role in determining state and local taxes, license and title fees, and insurance premiums. Additionally, the driver’s territory incorporates daily fuel prices into the equation. By leveraging Cardata’s cutting-edge software, precise location tracking becomes possible, enabling regionally sensitive tax-free vehicle reimbursements. This approach ensures that employees receive fair compensation based on their specific geographical context.

To learn more, read our article on the geographical aspects of FAVR:

Geography of FAVR: how driver location determines rates

Step 4: Setting mileage bands for accuracy

Put simply, a mileage band is the range of miles an employer predicts an employee will drive. Assigning appropriate mileage bands is a crucial aspect of any vehicle reimbursement program.  

These bands are designed to calculate the impact of mileage on a vehicle’s future resale value and maintenance costs. The higher the mileage band, the more money will be doled out. For example, an employee who drives 50,000 miles may be eligible for an additional $50 per month, as opposed to someone driving 25,000 miles annually. 

Keep in mind, however, that mileage bands only impact fixed reimbursements – not the variable components. Cardata’s technology simplifies this process by automatically adjusting reimbursements based on each employee’s actual mileage throughout the vehicle’s lifespan, accounting for both personal and business miles driven. 

Nevertheless, there are cases where clients choose to exclusively report business miles; in these scenarios, our representatives ensure drivers receive the reimbursement they are entitled to, by elevating their mileage band by a single level. This ensures fair and accurate compensation, accounting for individual driving habits and reducing administrative complexities for both employees and the company.

Read more about mileage bands.

Step 5: Embracing monthly FAVR reimbursements

Leave the monthly FAVR (Fixed and Variable Rate) reimbursements to us! This component comprises a fixed rate paid monthly, alongside a variable rate calculated per mile. The fixed rates cover fixed expenses such as depreciation, insurance, license, and taxes—the costs incurred to put a car in the driveway—while variable rates account for operating costs like fuel, maintenance, and tires. 

To ensure precise and up-to-date reimbursement adjustments, Cardata diligently tracks and records these costs on a daily basis – you and your employees will have all the documentation you need at your disposal when tax season rolls around. By doing so, we guarantee accuracy and fairness in variable reimbursements, such as fuel costs, through monthly adjustments. 

Conclusion

Selecting the right vehicle reimbursement partner and establishing a strong foundation for your program is pivotal to your company’s success. With Cardata, you gain access to a team that possesses unmatched expertise in reimbursement management, ensuring your journey is smooth and hassle-free. Our reliable representatives and advanced software services are here to support you every step of the way. Don’t hesitate to reach out to us today if you’re hoping to unlock the full potential of your employee vehicles with a FAVR program – we’ll simplify and streamline your journey toward effective and transparent reimbursements.

^{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 or 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.}