Depreciation

Depreciation is the reduction in a vehicle’s value over time due to factors like usage, age, and market conditions.

In mileage reimbursement programs like Fixed and Variable Rate (FAVR), depreciation represents the portion of a driver’s fixed reimbursement that accounts for the vehicle’s loss in value. It is typically the largest component of the fixed monthly rate.

Depreciation is usually calculated by:

• Taking the vehicle’s initial value
• Subtracting its estimated value at the end of a defined period, often called the retention cycle
• Spreading that difference evenly over the life of the vehicle

For example, if a vehicle is purchased for $30,000 and expected to be worth $10,000 after five years, the $20,000 loss in value is allocated over 60 months to determine the monthly depreciation amount.

Depreciation can also affect how reimbursement programs are structured from a tax perspective. Drivers who use accelerated depreciation methods on their personal vehicle may face additional considerations, while those using standard, straight-line depreciation are generally aligned with tax-advantaged reimbursement structures.

Because it reflects one of the largest costs of owning a vehicle, depreciation plays a central role in setting accurate reimbursement rates and understanding the true cost of driving for work.