How to keep your tax-free status on a FAVR program
In order to keep your tax-free status as a driver on a FAVR program you need to do certain things, like updating your insurance.
How tax-free FAVR programs help drivers
At Cardata, we care about our drivers. We serve thousands of sales reps, territory managers, account executives, etc., all over the US and Canada. Drivers are our biggest stakeholders, and we continuously improve our products and services to meet their needs.
Here, we have put together an overview of what drivers need to know about adhering to their driving policy. Policy adherence is especially important right now as gas prices and inflation are on the rise. Being in compliance with your driving policy means you pay less tax—and everyone could use those extra dollars in their pocket right now.
Understanding your policy
The first thing drivers can do to win on a reimbursement program is to learn about the compliance requirements of their program. The main thing to note is that if you go out of compliance, you can be taxed retroactively.
However, Cardata has a whole set of controls that they can use to make sure drivers see little to no tax at all on their program. So it is important to read and understand the policy that Cardata designs with a driver’s company.
Once you understand your policy, you will know if there is any chance that you are going to see tax. Then, you can talk to your support team at Cardata, and your manager and work, and figure out a solution that keeps your tax burden minimized.
So what do you need to look out for in your policy?
1. Vehicle age and depreciation
You need to understand how old your car is allowed to be. This detail matters if you are on a Fixed and Variable Rate (“FAVR”) reimbursement program. In order for FAVR reimbursements to be tax-free, you cannot have a car that is fully depreciated. That is because part of the reimbursement—part of the fixed portion—repays for the expense of depreciation. Once your car is fully depreciated, if you are still being repaid for depreciation, you get taxed on that portion of the reimbursement.
Cardata has an easy way to avoid this though: once your vehicle ages out of a FAVR program, you do not have to buy a new one. Instead, we just move you to our Tax-Free Car Allowance (“TFCA”). On TFCA, it does not matter how old your car is. So drivers just need to be aware of the depreciation schedule in their policy, and if they know they want to keep their car, they can simply plan for a switch from FAVR to TFCA.
2. Expected mileage and mileage bands
Secondly, you need to know how far you are expected to drive in a year. There are two reasons for this.
The first reason is that you need to be a high mileage driver to qualify for FAVR programs.
The number of miles that qualifies as “high” can change over time, so it is best to think about it like this:
- You are a high mileage driver if you drive for work all the time.
- You drive to meet customers every day, you travel between towns, etc.
- Your car is one of the primary tools you use for your job.
The travelling salesperson is the archetype of the high mileage driver.
A high mileage driver should be contrasted with an occasional driver—someone who, for example, uses their car once in a while to make a bank deposit while on the job. This driver obviously still needs to be reimbursed for this expense, but their car is not a tool they use all the time for work. They are just periodically asked to use their personal car for business purposes.
For drivers, the difference again comes down to what program they should be on. If you are a high mileage driver, your best bet is to be on a FAVR program. If you are an occasional driver, you should be on a Cents per Mile (“CPM”) program. In this program, you pay zero tax and get the best rate for the few miles you drive each year.
You can also switch from FAVR to CPM if need be. In your policy, you will see how many miles you need to drive in order to qualify for FAVR. All you have to do, if you are worried that you are not able to make the minimum mileage, is alert your manager, and they can make sure you get switched to Cents per Mile. Easy.
The other thing you have to know is what your mileage band is. Mileage bands determine part of your FAVR reimbursements. A mileage band is the range of miles that you are expected to drive during the year—for example, 15,000 to 20,000 miles. Since your reimbursement rate is in part determined by this mileage band, if you drive less than expected, you risk seeing some tax.
Again, this is an easy problem to avoid. Just work with your manager to set an accurate mileage band, and if you end up driving less, just switch to a new one to keep your personal tax exposure low.
3. Buying a new car
When purchasing a new vehicle, there are certain things you have to be aware of. The main thing is what your program standard vehicle is. A program standard vehicle is essentially a digital representation of a car, and your reimbursement rate is based on it.
It is one of the most important aspects of a vehicle reimbursement program: in fact, it makes a program possible. Think about it: if you had to calculate the costs of every actual vehicle owned by a mobile sales force and base reimbursements on those costs, you would need a full-time staff of accountants crunching numbers all month. You have to find a way to standardize and average reimbursements for a reimbursement program to work—the time it would take to do anything else is totally impractical.
Read more about program standard vehicles here.
Your company and Cardata jointly figure out what car makes sense for the work you do. A car is selected based on what is reasonable to drive for business. You do not have to buy the same car as the program standard vehicle. But you do have to buy one that costs 90% of the MSRP of the program standard if you are on a FAVR program.
The IRS has this rule so that your reimbursement does not drastically exceed your actual driving expenses.
So, when you buy a new car, make sure you know the MSRP of your program standard vehicle, and make sure your dealer invoice equals 90% of said MSRP!
Make sure your insurance is up to date. Your driving policy will contain instructions for how much insurance to procure.
Often, values will read something like “100/300/100”—this means that you should purchase insurance covering the following: $100,000 for injuries to a single party, $300,000 for all injuries, and $100,000 for property damage.
Read more about US auto insurance here.
You also need the right endorsement: business use. There is a difference between “commercial use” insurance and “business use.” You need the latter to use your personal vehicle for work. Every insurance provider in the US provides such an endorsement, but they often have different codes for them. A Cardata expert can tell you what the relevant code is for every insurance provider.
Read more about business use endorsements here.
Getting the right insurance is not only necessary for adhering to your company policy, but also for adhering to IRS rules. Being out of compliance can leave you exposed to taxes.
One part of onboarding with Cardata is insurance verification. When you are getting started on the program, you will submit your insurance documents, and our compliance team will make sure you have the right coverage. You will get notified right away if there are any issues.
We will also touch base yearly to make sure your insurance is up to date. We help avoid costly unintended consequences from compliance lapses by staying on top of your insurance renewals.
It is easy to do so with your insurance provider. This creates an income tax expense for you that could have been avoided.
There are simple things that drivers can do to maintain their tax-free status while on a FAVR program. The first and foremost is to understand their driving policy.
To recap, understand the following about your policy and you will be well-served by your FAVR program:
- Know how old your car is allowed to be
- Know what insurance you are required to purchase
- Know the MSRP of your program standard vehicle if you are buying a new car
- Know your mileage band and stick to it
Once you have mastered these concepts, you will be in great shape to take advantage of your FAVR program. We can help. You can read more about driving on a reimbursement program here:
The 3 ways drivers benefit from mileage reimbursements in 2022.
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