When to Update Your FAVR Program and Why It Matters

Your FAVR reimbursement program is key for managing vehicle expenses while keeping your mobile employees happy. But like any good tool, it needs regular maintenance to stay effective, compliant, and fair. Whether it’s adjusting for rising gas prices or staying aligned with IRS guidelines, updating your FAVR reimbursement plan is not just smart—it’s essential.

Here’s when and why you should revisit your FAVR program.

When the IRS updates its mileage guidelines

The IRS mileage rate isn’t set in stone. Each year, the IRS adjusts the standard mileage rate based on national averages for fuel costs, depreciation, and other vehicle expenses. If your FAVR reimbursement program isn’t aligned with these updates, you risk falling out of compliance or under/overcompensating employees.

• Why it matters: Staying IRS-compliant means that your reimbursement remains tax-free and avoids unnecessary tax waste.
• Action step: Review your fixed and variable rates annually to make sure there’s alignment with IRS mileage rate changes and other IRS guidelines.

When gas prices and maintenance costs spike

Fluctuating gas prices, oil changes, or rising vehicle costs can throw off the balance of your variable rate reimbursement. If you’re not recalibrating your program to reflect these costs, you may be under/over reimbursing employees for their business mileage.

• Why it matters: Variable expenses like gas, repairs, and registration fees change frequently and directly impact the business use of employee vehicles.
• Action step: Regularly review fuel trends, local taxes, and average maintenance costs to keep your reimbursement rates fair and accurate.

When mileage bands need to change

Mileage bands, like 10,000–15,000 miles per year, serve to help determine fixed reimbursement rates in a FAVR program. These ranges allow businesses to tailor vehicle reimbursement to actual employee driving patterns, ensuring that team members who drive less aren’t overcompensated while real road-warriors are fairly reimbursed for business use.

Currently, top companies have 10–15k mileage bands, which is well-suited for most mobile employees. However, businesses with drivers operating above or below this range should adjust their FAVR car allowance accordingly. Regularly reviewing your annual mileage bands means that your program remains equitable and reflective of actual business mileage.

When Business Use Percentages (BUPs) need to change

The Business Use Percentage (BUP) represents the expected portion of an employee’s vehicle usage for business purposes. The industry standard is 71.4%, but some competitors operate at 70%, slightly below the benchmark.

This difference may seem minor, but it can have a big impact on reimbursement rates and total program costs. Setting your BUP too low could result in overcompensation for personal use, while setting it too high could risk underpaying employees for their actual business travel. Periodic evaluations of your BUP based on employee driving habits and mileage tracking app data can help maintain fairness and compliance.

When vehicle retention cycles need to change

The vehicle retention cycle, or the length of time depreciation is calculated for, plays a key role in determining fixed costs. Longer retention cycles lower monthly fixed reimbursements, reducing the overall cost to the company. However, they also need to align with actual vehicle replacement schedules to ensure that reimbursements remain realistic for employees.

By optimizing your vehicle retention cycle, you can better balance employee satisfaction with cost savings and avoid unnecessary adjustments later. Keeping this metric in sync with real-world depreciation trends and IRS guidelines means a tax-free reimbursement structure while supporting your employees’ needs.

When your workforce or business changes

If your company grows, restructures, or starts operating in new regions, your FAVR reimbursement plan might need a tune-up. For example, team members in California face different vehicle costs than those in Texas or Canada. Similarly, a growing mobile workforce or increasing number of miles driven can shift your program’s cost dynamics.

• Why it matters: A program tailored to your business’ current needs keeps your employees happy and your costs under control.
• Action step: Adjust your variable rate and fixed costs to reflect your employees’ locations and actual driving patterns.

When technology advances

New tools for mileage tracking and expense management can make your vehicle reimbursement program more efficient. If your program still relies on outdated spreadsheets or manual logs, it’s time for an upgrade.

• Why it matters: Adopting a mileage tracking app can streamline mileage logs, ensure accurate reimbursements, and reduce admin headaches.
• Action step: Explore modern mileage reimbursement tools—like Cardata’s—that provide real-time tracking, better analytics, and integration with your current systems.

When employees feel shortchanged (or overcompensated)

Employee feedback is a critical measure of your program’s effectiveness. If employees feel they’re not being reimbursed fairly, they may lose trust in the program. Oppositely, over-reimbursing employees wastes money and skews your deductible expenses.

• Why it matters: An equitable FAVR vehicle reimbursement program improves employee satisfaction while protecting your bottom line.
• Action step: Regularly survey your team to make sure your FAVR car allowance aligns with their actual costs for business mileage.

When IRS compliance is at risk

IRS compliance isn’t just about the mile rate—it’s about the whole structure of your entire FAVR reimbursement program. Falling out of line with IRS tax rules could turn your tax-free reimbursement into a costly taxable ‘income’.

• Why it matters: An IRS-compliant program keeps your company free from audits and unnecessary expenses, protecting both you and your employees.
• Action step: Work with an expert partner like Cardata to ensure your program meets all IRS regulations and guidelines.

When market trends shift

The auto market is always in motion. Whether it’s the rise of EVs or new trends in depreciation and variable costs, your program should adapt to reflect these changes. For example, as EV adoption increases, your reimbursement structure may need adjustments to cover charging station fees instead of traditional fuel costs.

• Why it matters: A forward-thinking program prepares you for the future while ensuring fair reimbursements today.
• Action step: Regularly evaluate market conditions and update your program to reflect the realities of owning and driving a personal vehicle in your business.

Keep your FAVR program moving forward

A well-maintained FAVR reimbursement plan isn’t just about numbers—it’s about supporting your employees while protecting your business. By staying proactive and making adjustments when needed, you’ll ensure that your mileage reimbursement program stays compliant, efficient, and fair for everyone.

Need help fine-tuning your program? Reach out to Cardata for expert guidance on creating a dynamic and IRS-compliant solution that works for your mobile workforce.