A Finance Professional’s Guide to the Tax Advantages of a FAVR Program

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If you find yourself managing vehicle expenses for employees who drive for business purposes, it’s common for finance professionals to have a lot of decisions to make. Traditional car allowances and company cars come with lots of financial and tax-related burdens, but there’s another option that’s much more viable: the FAVR (Fixed and Variable Rate) program.

In this blog, I’ll break down why a FAVR reimbursement plan is worth considering, especially for finance teams looking to manage costs and ensure IRS compliance.

What is a FAVR program?

A FAVR program is a reimbursement model that combines two elements that most finance folks are familiar with: fixed costs (like depreciation, registration fees, and insurance) and variable costs (fuel, maintenance, and wear and tear).

The main appeal for companies and employees alike is that this program is designed to provide the most equitable and accurate reimbursement for personal vehicle use based on an employee’s regionally specific location, vehicle type, and actual expenses.

So often businesses find themselves paying unnecessary taxes for their non-compliant vehicle programs. So, unlike car allowance programs or using the IRS standard mileage rate, a FAVR reimbursement is tax-free, as long as it follows and abides by the IRS guidelines. That’s a pretty big win for businesses wanting to avoid paying unnecessary taxable income and for employees who want to see more in their bank accounts every payday.

What are the tax advantages of a FAVR program?

1. It offers tax-free reimbursements

With a smartly structured FAVR program, reimbursements for mobile employees’ business mileage and vehicle costs don’t count as taxable income. This is a big-time benefit compared to other more traditional car allowance programs, where the full allowance amount is often considered income so it’s subject to income tax. A FAVR plan provides tax-free payments that match drivers’ actual expenses, saving both the company and the employee from unnecessary tax liability.

2. It’s compliant with IRS guidelines

To keep everyone’s reimbursements tax-free, a FAVR program needs to follow the strict IRS-approved rules. First off, a Vehicle Reimbursement Program (VRP) like FAVR only qualifies as an accountable plan if the employees substantiate their business miles and expenses through mileage logs, receipts, and other documentation. The FAVR plan reimburses fixed and variable costs only for business use, so this makes it a compliant and IRS-friendly alternative to taxable car allowances.

3. It offers a very accurate reimbursement

It’s pretty common for traditional car allowances, Cents per Mile rates, and even fleets or company cars to provide a “one-size-fits-all” reimbursement model. But business mileage and expenses aren’t uniform like that, especially not across all regions and states. For instance, vehicle expenses and fuel costs in California will not be the same as those in Texas or Florida. A FAVR reimbursement program takes into account the employee’s location and car type, which means a more accurate reimbursement for vehicle-related costs based on actual market conditions.

Not only can this make your reimbursements fairer for your mobile employees but also minimizes the risk of over- or under-reimbursement, both of which can negatively impact your company’s finances over time.

4. It can reduce a payroll’s tax burden

Car allowance programs or company car provisions that show up as part of an employee’s compensation can inflate payroll taxes. On the other hand, a FAVR program reduces this burden. By reimbursing only tax-free expenses, companies can minimize payroll taxes while ensuring employees get full compensation for their business mileage and vehicle costs.

How to cut costs without compromising efficiency

So not only are there tax benefits, but a FAVR program also helps finance professionals better control overall vehicle expenses. With traditional programs, companies will often struggle with the administrative burden of tracking every single mile and managing fixed vehicle costs. FAVR plans, however, can automate mileage tracking and mileage logs through apps, making it easier for employees to track and log business miles and for companies to process employees’ reimbursements.

Plus, fixed and variable rate calculations adjust in-app automatically based on factors like depreciation, registration fees, and fuel costs in each region/state, meaning employees are reimbursed based on their actual costs rather than arbitrary rates determined beforehand. This reduces the risk of overpaying on allowances or reimbursing inaccurately, which can happen pretty frequently in a flat-rate car allowance program.

FAVR helps with employee satisfaction and retention

Not only does a FAVR plan help to streamline business expenses for your company, but it’s also an attractive option for mobile employees. Imagine telling your employees that their vehicle reimbursement will no longer be taxed like taxable income, and that they’ll be receiving payments that cover their full actual expenses for business use. That’s a compelling reason for your mobile employees to be happy and stick around. It also provides an extra layer of transparency and fairness in reimbursement rates, which is something today’s workforce values.

Is a FAVR program right for your business?

If your company offers a taxable car allowance program and you or your HR department or an administrative team is dealing with all the hassle of managing company cars, a FAVR plan could be a viable solution that delivers tax savings, improves employee satisfaction, and reduces administrative work. It’s particularly well-suited for businesses with mobile employees who need fair, accurate, and tax-free reimbursements for their business miles.

Before launching your FAVR program, it’s important to ensure that it meets all IRS requirements for tax-free reimbursement, qualifying it as an accountable plan. This means you’ll need a process in place for mileage tracking, expense documentation, and reimbursement rate calculations that are adherent to all IRS guidelines. Partnering with a vehicle partner like Cardata, a FAVR solutions provider, can make this process much simpler, ensuring you’re not missing out on key tax deductions or advantages.

Conclusion

For finance professionals looking to reduce tax liability while still providing fair, accurate reimbursements for business mileage, a FAVR program offers a powerful solution. It helps your company stay compliant with IRS rules, reduce payroll tax burdens, and give employees the benefit of tax-free reimbursements. If you’re ready to explore a FAVR plan, it’s time to assess your current vehicle reimbursement strategy and see how a shift to FAVR could benefit both your bottom line and your team.