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December 18, 2023 - 2 min read

Fixed and Variable Rate (FAVR)

Fixed and variable rate (FAVR) allowances or reimbursement, also known as a mileage reimbursement plan, is a method in which you can compensate your employees for using their own vehicles for work-related activities. FAVR is an IRS-approved way of reimbursing employees, meaning your company can earn a tax break for the mileage driven. However, in order to claim these expenses, it is important to understand how these programs work.

What is FAVR?

A FAVR plan reimburses employees through a combination of fixed payments and variable payments for mileage. This has advantages because fixed payments can be tailored to costs for an employee's specific location as well as their actual mileage-related costs. By using a combination of these two factors, it can help to prevent under or overcompensating employees for their costs.

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How does FAVR work?

A FAVR reimbursement method incorporates two types of payments, fixed and variable. You will need to make a fixed payment that covers the fixed costs of operating a motor vehicle, such as insurance, depreciation, taxes, and other fees. These expenses are all added together and then reduced to reflect the percentage of use attributable to business purposes. 

The periodic payment for variable expenses represents the regular operating costs of the vehicle, such as fuel costs and routine maintenance activities. The value of these payments will vary based on the actual amount of business-related travel that occurred in the period. You will need to make fixed and variable payments on a regular basis, often monthly or quarterly. IRS guidelines require both of these payments to be made on at least a quarterly basis.

How companies provide FAVR

Companies provide their employees with a fixed and variable rate car allowance in place of providing a monthly car allowance or using the IRS standard mileage rate. Although, the government limits the FAVR program to companies that have at least five employees who drive over 5,000 business-related miles a year. 

IRS guidelines require businesses to meet certain requirements for the age and the maximum cost of the cars the employees will be using for the FAVR program. The maximum cost of the car is set at $62,000 for 2024. So it is not too restrictive.

Employers pay the FAVR car allowance to employees as a combination of a monthly fixed payment combined with a variable payment. FAVR is a very effective way of covering all of your employees' business car expenses.

FAQ

The company will add the fixed costs of using a car, such as registration, license, depreciation, taxes, and insurance for the chosen car, and then take the percentage of these costs attributable to business purposes. Then, the company divides this total by 12 to obtain a monthly cost. After this, the company will add the fuel cost for the area along with the cost of oil changes and tires for the chosen car. Companies then use these costs to determine a per-mile variable rate, which they multiply by their employee's mileage.
A FAVR program bases your employees' allowance on the actual fixed and variable costs of their business use of their personal vehicles. By using actual costs rather than giving a standard car allowance, your employees avoid losing part of the money to taxes, and you get a tax deduction.

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