Vehicle Capital Cost

Vehicle capital cost refers to the original purchase price of a vehicle when it is new. It is used as a key input in certain mileage reimbursement programs.

In Fixed and Variable Rate (FAVR) programs, capital cost is part of the standardized vehicle profile used to calculate reimbursement. Because higher-priced vehicles generally come with higher depreciation and ownership costs, a higher capital cost typically leads to a higher fixed reimbursement.

The IRS sets a maximum capital cost limit for FAVR vehicle profiles. This helps ensure reimbursements stay within reasonable bounds for tax-free treatment.

Capital cost also plays a role in compliance. To remain eligible, a driver’s personal vehicle must meet a minimum cost threshold relative to the program’s standard vehicle. If the vehicle’s original cost falls below that threshold, a portion of the reimbursement may be subject to the taxable income test.

Accurate reporting of vehicle capital cost helps ensure reimbursements are fair, consistent, and aligned with IRS rules.