Fixed and variable rate (“FAVR”) programs are intelligent driver reimbursement solutions. When properly implemented, they fairly and accurately reimburse drivers who use their personal vehicle for work. They replace traditional company vehicle programs, allaying the problems of fleet and car allowance systems.
What do FAVR programs replace?
Outdated models for business driving, like fleet and allowance, led to tax waste and insurance liability. Fixed and variable rate programs avoid tax waste by issuing reimbursements instead of allowances. They mitigate insurance risk by insuring vehicles for business and personal use with a combination of employer and employee insurance.
FAVR also outperforms cents per mile (“CPM”) reimbursement programs. While the cents per mile model can also be non-taxable, it does not account for disparate fixed and variable costs applicable to diverse locations and vehicles.
Which expenses are fixed?
The fixed costs for which FAVR programs reimburse employees include depreciation and insurance. One has to know the price of a car, and be able to calculate the depreciation of the vehicle. Insurance costs depend on one’s home address—they can even vary between two neighbourhoods of one city—and must be calculated as well. After these and other relevant fixed expenses have been tallied, FAVR plans reimburse a fixed rate every month.
Which expenses are variable?
The variable costs include fuel, maintenance and repairs, and oil and tire changes. They vary because they depend on the number of miles driven, whereas fixed expenses do not change in relation to distance travelled. Additionally, fuel costs fluctuate, sometimes significantly.
How are calculations made?
Reimbursement calculations begin with a business use percentage. Companies generally pay for 71% of fixed and variable expenses, since employees ordinarily drive for work 5 of 7 days per week. Companies only pay the variable expenses for business mileage.
The system then calculates depreciation based on the price of an employee’s vehicle. Then, once local insurance costs are identified, a fixed value to be reimbursed every month is calculated.
Secondly, drivers capture their mileage throughout the month. The company reimburses them for the miles they’ve driven, factoring in local fuel and maintenance costs.
For mobile workforces that span cities, states, and countries, a FAVR program is a vital tool. FAVR reimburses employees precisely in accordance with their location. Vehicle operating costs vary regionally.
Alternatives that do not account for regional variations always over- or underpay employees.
A selection of standard vehicle profiles is codified in FAVR plans. A “standard vehicle” is a digital representation of a vehicle that an employee could reasonably drive for their job. Employees can be reimbursed tax free if they buy a vehicle that resembles the standard vehicle’s age and cost.
The IRS requires that you remain compliant with the terms of a FAVR program for reimbursements to be non-taxable. Cardata works together with companies to implement specific policies that best suit the organization, while adhering to IRS rules. The following are examples of IRS compliance regulations.
- Any car on the program must be driven at least 5,000 miles per year. If the car does not cross the threshold, any reimbursements are assessed for tax at the end of the year.
- Employees must buy cars that cost at least 90% of the standard vehicle profile price. If the profile has a stated price of $50,000, then the actual car must cost at least $45,000. A standard vehicle also has to remain, in 2021, under $51,100 to be compliant.
Measures like this are in place because the IRS does not want reimbursement plans to be channels for undeclared compensation.
If you’re considering a FAVR program, Cardata would be happy to further explain these niceties.
FAVR systems are difficult to implement. They involve:
- calculations from extensive and fluctuating datasets
- accurate mileage logging for reimbursement and audit
- different payment structures for every driver in the company.
If you have questions about FAVR get in touch with a Cardata specialist. If you would like to learn more about vehicle reimbursements and related topics, sign up for our newsletter below!
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