Generally, depreciation is the decrease in the value of an asset over time. On a FAVR program, depreciation usually refers to the depreciation component of a driver’s monthly fixed reimbursement. This is the portion of the reimbursement that’s intended to reflect the cost of the vehicle itself. It is typically the largest part of the fixed rate.
Depreciation is calculated by taking the cost of a driver’s vehicle profile, subtracting its value at the end of an assumed retention period, and dividing the result by the number of months of the retention period.
For example, if a driver’s vehicle profile costs $30,000 and is expected to be worth $10,000 at the end of a 5 year retention cycle, that driver’s monthly depreciation will be $333.33. Here, $20,000 of lost value is spread out evenly over 60 months. As a result, the driver will receive $333.33 per month as part of their fixed reimbursement.
“Depreciation” can also refer to depreciation on a personal vehicle that has been claimed as a business expense on a driver’s tax return. This is a separate concept.
When driver’s register for FAVR programs, they complete a short IRS vehicle declaration that includes whether they have depreciated their car on their taxes. If they have, they are still eligible for FAVR, but only if they used the straight-line method to depreciate their car. If they used an accelerated depreciation methodology instead of straight line, their FAVR reimbursement will be tested for taxable income unless they register with a different car.
Learn more about how FAVR reimbursement programs work for businesses, including eligibility, benefits, and more, and find out more about how fixed expenses like depreciation work in a FAVR program.