Variable Expenses of Driving and FAVR Reimbursements

Introduction 

Finding the right vehicle reimbursement plan for your mobile workforce – whether the mileage drivers accrue is high or low – doesn’t have to be complicated or stressful. Whether the remuneration you’re looking for prioritizes the simplicity of a pared-down cents-per-mile methodology or a broader tax-free car allowance, the realm of business-related vehicle usage and standard car allowances can be customized according to your company’s needs. 

Nevertheless, having a strong understanding of the interplay between fixed costs and variable rates certainly goes a long way when determining the kind of program that will be most cost-efficient. While fixed business expenses maintain a steady presence throughout just about any kind of journey your employees may undertake, variable expenses can be rather mystifying for those workers forced to navigate the roads using their own vehicles. That being the case, this article will explore the nitty-gritty details of the variable expenses that comprise employee reimbursements.

Defining variable expenses of FAVR allowances

The Internal Revenue Service (IRS) defines variable car expenses as the cost pertaining to the distance traveled by mobile employees using their own cars for business purposes.¹ These expenses vary because the number of business miles accrued can be more or less costly in accordance with the kind of services, as well as vehicle type and age. The tapestry of variable costs your employees may encounter includes fundamental, unavoidable things such as:

• Gas prices
• Tolls and road-related fees
• Parking
• Miscellaneous vehicle costs

The IRS standards set out suggest a periodic variable payment be paid, at the very least, on a quarterly basis. This allotment ought to cover the projected operating costs of driving a standard automobile, including fuel, taxes, oil, tires, routine maintenance, registration fees, and repairs.

¹  Rev. Proc. 2000-48 | Internal Revenue Service

Importance of variable expenses in FAVR reimbursements

Variable expenses are pivotal within the framework of FAVR programs, acting as the linchpin that connects the distance an employee drives for business purposes and the subsequent costs incurred according to a standard mileage rate. While fixed expenses, such as lease payments, depreciation, and insurance premiums, maintain are consistent and do not paint the whole financial picture of business mileage. 

By taking into account all costs, organizations can ensure that reimbursement payments reflect the true economic impact of employees’ driving activities, fostering a sense of transparency within the organization and demonstrating a commitment to recognizing the financial realities faced by employees who drive their personal vehicles for work-related purposes. This approach not only enhances employee satisfaction but also helps to retain top talent and foster a culture of trust and collaboration. 

Factoring in variable expenses, moreover, promotes fiscal prudence and accuracy in mileage reimbursement programs. To illustrate the significance of variable expenses in FAVR plans, consider a scenario where only fixed expenses are considered for vehicle expense reimbursements. Ignoring variables fails to capture the true essence of the financial burdens faced by employees.

Fuel costs

Fuel costs stand as a prominent variable expense, exerting a profound influence on the financial landscape of business-related driving. As employees embark on their journeys, the fuel consumed becomes a tangible manifestation of the miles covered. In the realm of reimbursements, it is crucial to consider the nuances of fuel costs, as they hold the key to accurately compensating employees for their fuel-related expenditures.

• Fuel prices: The current fuel prices must be carefully monitored, as they have a direct impact on the overall cents-per-mile rate. Fluctuations in fuel prices can significantly influence reimbursement rates, and failing to account for these changes may lead to imbalanced and inaccurate reimbursements.
• Fuel efficiency: Different vehicles have varying levels of fuel consumption, and it is essential to factor in this discrepancy when calculating reimbursements. Employing a standardized approach without considering fuel efficiency may lead to overcompensation for some employees and under-compensation for others, compromising the fairness and integrity of the reimbursement process.
• Distance and fuel: As the miles accumulate, so does the fuel expenditure. By incorporating the distance covered, organizations can tailor their reimbursements to reflect the actual fuel consumption associated with specific journeys. This approach ensures that employees are reimbursed in a manner that aligns with their individual driving requirements and minimizes the risk of either excess or inadequate compensation.

Read more: How do gas prices affect employee mileage reimbursements? 

Maintenance and repairs

The symbiotic relationship between mileage and the wear and tear experienced by a vehicle highlights the significance of accounting for maintenance and repair costs.

• Consistent maintenance: Routine maintenance costs, such as oil changes and tire rotations, form an integral part of the ongoing care required for a vehicle’s optimal performance. As mileage accumulates, these maintenance tasks become more frequent, directly impacting the financial burden on employees. By factoring in these routine maintenance costs as significant variable expenses, organizations can ensure that reimbursements reflect the true economic impact borne by those who diligently traverse the roads of productivity. 
• Wear and tear: Increased mileage experienced by employees may also give rise to unforeseen repairs. The wear and tear on various vehicle components intensify over time, necessitating occasional repairs to maintain the vehicle’s reliability and safety.
• Accidents: While accidents are more common the more you drive, note that insurance premiums are covered by the fixed portion of a fixed and variable rate reimbursement.

Failing to consider these variable expenses can result in employees bearing the full weight of maintenance and repair costs, eroding the fairness and equity of the reimbursement process.

Tolls and parking fees

Tolls represent a ubiquitous feature of many road networks. The frequency and cost of tolls can vary depending on the specific locations traversed. Parking fees, too, leave their mark on the financial landscape of business travel. Whether it be at airports, city centers, or various other destinations, finding a secure space for vehicles often comes at a cost. As we have seen in recent decades, increased anti-traffic congestion tolls have become popularized throughout the world as a means of incentivizing alternative modes of transportation. These fees, influenced by factors such as location, duration, and demand, can accumulate over time, significantly impacting the overall expenses incurred by employees.

However, tolls and parking fees are not included in FAVR reimbursements. IRS procedure states that employees should claim their tolls and parking fees separately from their vehicle reimbursements. At the end of the year, employees may deduct these expenses on their taxes, as they will not have been reimbursed by a FAVR program.

Miscellaneous variable expenses

Beyond fuel costs, maintenance and repairs, tolls, and parking fees, there exists a series of miscellaneous variable expenses that deserve careful consideration when calculating reimbursements.

• Aesthetics and cleanliness: Car washes, for instance, stand as an ancillary expense directly linked to mileage. As employees traverse various terrains and weather conditions, their vehicles may become soiled and require cleaning to maintain their aesthetic appeal and functionality, especially if the vehicle is branded. These ancillaries, however, are not directly reimbursed by FAVR programs.
• Vehicle inspections: Regular inspections ensure that vehicles remain in optimal condition and comply with safety regulations. As mileage accumulates, the need for inspections becomes more frequent, imposing additional financial obligations on employees. By incorporating these inspection costs into the reimbursement calculations, organizations acknowledge the importance of vehicle maintenance and provide employees with fair compensation for this aspect of their driving responsibilities. These costs would fall under the maintenance category, as regular service is an important part of maintenance. 

Accurate expense tracking

In the quest for precise and equitable reimbursement, organizations must prioritize the implementation of a robust system of mileage trackers that facilitate the accurate documentation of variable expenses. The more accurate these tracking systems are, the more cost-efficient they are for your drivers.

• Mileage trackers: The most effective approach to accurate expense tracking is the use of mileage-tracking apps. These apps leverage the power of technology to automatically track and record mileage, eliminating the need for manual calculations and reducing the chances of errors or omissions. With features such as GPS tracking and automatic trip detection, these apps provide a seamless and efficient method for capturing mileage data. Mileage-tracking apps can save drivers up to a week of work per year.
• Expense management software: This is a comprehensive solution for tracking and reporting variable expenses. These software solutions allow employees to input and categorize various expenses associated with business travel. By centralizing and automating the expense tracking process, organizations can gain valuable insights into the overall costs incurred, facilitate accurate reimbursements, and ensure compliance with income tax regulations.
• Analog spreadsheets: Manual record-keeping processes can also be effective for those who prefer a more traditional approach. Maintaining a detailed mileage log, as outlined in an IRS-compliant format, provides a systematic, albeit meticulous, method for tracking and reporting variable expenses.

Compliance and documentation

When incorporating variable expenses into FAVR car allowances, organizations must prioritize adherence to tax regulations and guidelines. Accurate record-keeping and meticulous documentation of variable expenses play a pivotal role in substantiating reimbursements and ensuring compliance with the requirements set forth by IRS.

One of the key aspects of compliance is the need to maintain accurate and detailed records of variable expenses. This includes keeping track of receipts, invoices, and other supporting documents validating the expenses incurred. These records serve as evidence of the actual costs and help establish the legitimacy of the reimbursements provided to employees.

IRS guidelines necessitate the proper classification and categorization of variable expenses. Each expense should be appropriately allocated to the relevant expense category, such as fuel costs, maintenance, repairs, tolls, parking fees, or other miscellaneous expenses. Accurate categorization allows for better analysis of expenses and ensures that reimbursements align with the specific cost components associated with business-related driving.

Maintaining compliance with tax regulations also requires organizations to stay updated on any changes or revisions to the guidelines. It is crucial to remain informed about the IRS rules and any amendments to the IRS mileage rate governing fixed payments, variable costs, tax deductions, and the like. Keep in mind, any FAVR program worthy of the name – that is to say, well-designed – does not guarantee 100% tax-free reimbursements. Failing to abide by certain rules will necessitate some taxation – that’s why documentation, knowledgeability, and compliance are essential.

Conclusion

Variable expenses for driving play a vital role in determining accurate and equitable reimbursements for employees’ business-related vehicle usage. By considering costs such as fuel, maintenance, repairs, and other variable expenses, FAVR vehicle programs ensure fair compensation for the actual costs associated with employee mileage. Accurate tracking, compliance with tax regulations, and comprehensive documentation are essential to effectively incorporate variable expenses into the FAVR reimbursement process, ultimately resulting in fair and balanced compensation for employees.

^{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.}