What is a FAVR Program?
A Fixed and Variable Rate (FAVR) Program is an IRS Approved, Non-Taxable Vehicle Reimbursement Program. This program provides drivers with a fair and equitable reimbursement with limited tax liability. First, the company chooses a benchmark vehicle that suits the program. For example, a sales company may reimburse expenses for an SUV while a construction company may reimburse expenses for a pickup truck. The drivers’ reimbursement rate is geographically sensitive so their reimbursement is for costs they incur daily.
There are two main parts to a FAVR Vehicle Reimbursement Program. Each reimbursement contains a fixed rate and a variable rate.
- The fixed rate includes depreciation from the benchmark vehicle, insurance down to 44,000 zip codes, and license, registration, and property tax by state. The fixed rate stays flat and changes when the benchmark vehicle is updated. We recommend updating the benchmark vehicle in the program annually to reflect current vehicle costs in the market.
- The variable rate includes the cost of fuel (updated monthly), maintenance, and tires. This is a cent per mile calculation. This amount changes every month from the amount of mileage recorded by the driver.
Benefits of a FAVR Program
There are several benefits to a Fixed and Variable Rate (FAVR) Vehicle Reimbursement Program for the company and its drivers.
- FAVR Programs offer company savings compared to the IRS Standard Mileage Rate. The IRS Standard Mileage Rate underpays low mileage drivers and overpays high mileage drivers while FAVR reflects real driver costs.
- FAVR Programs also offer company savings compared to company car allowances. Since car allowances are not based on real vehicle data, these reimbursements are fully taxable. FAVR Programs are non-taxable so companies will enjoy reduced employment and payroll taxes. Drivers will also enjoy lower tax liability on their taxable income by 30 to 40%.
- Drivers’ reimbursements are based on a vehicle’s actual cost of ownership. At AutoReimbursement.com, we call this our HR Defensible Program. The driver’s monthly statement shows the calculation for their vehicle reimbursement. This way drivers and plan administrators understand all the ingredients that go into their vehicle reimbursement. We have seen higher compliance rates and fewer concerns with this process.
- FAVR Programs have no capital requirements which frees up room for future company growth. This is important for companies that want to continue growing quickly. Not only this, a FAVR Program limits company liability drivers during their working hours.
- Driver’s choice – Drivers choose the vehicle they want to drive. Drivers find this important because company cars often have driving restrictions that may not work well with all families. Drivers get to choose the vehicle that suits their lifestyle best!
Overall, a FAVR Program is an exceptional alternative to using the IRS Standard Mileage Rate, a Company Car Allowance, or company cars for paying drivers a fair and equitable vehicle reimbursement.
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