When a driver’s reimbursement is tested for taxable income, their non-taxable limit is the maximum amount that they can receive without paying tax. It is equal to that driver’s business mileage in the period being tested, multiplied by the IRS standard rate. If their reimbursement in the period was less than this amount, their reimbursement is tax free. If their reimbursement was more than this amount, the difference is considered taxable income.
This only applies to FAVR drivers that are out of tax compliance, and drivers on accountable allowance programs. FAVR drivers that are in tax compliance are never tested for taxable income. Their entire reimbursement is tax free, regardless of amount.
Since the standard rate tends to over reimburse high mileage drivers, drivers with high business mileage have very high non-taxable limits. As a result, they typically do not owe tax on FAVR even when they are out of tax compliance.
To discover more, learn about FAVR programs and about car allowance programs. If you’re curious about how your company can optimize your vehicle reimbursement program, the benefit of vehicle reimbursement software, and how to help ensure compliance with IRS regulations, talk to a Cardata expert to discover more.