At first blush, FAVR (Fixed and Variable Rate) programs can appear to be simple. In this blog post, we show how vehicle reimbursement programs are...
What is a program standard vehicle?
A program standard vehicle is a car on which vehicle reimbursement programs are based. According to the IRS, they can cost up to $56,100.
A program standard vehicle is a vehicle that companies consider reasonable for business driving. It is used on reimbursement programs like Fixed and Variable Rate (“FAVR”). Reimbursements are based on the specifications of the program standard car.
Briefly, concerning reimbursement programs:
What distinguishes reimbursement programs from company car fleets is that, in the former system, employees supply and drive their personal car for work.
They are reimbursed for fixed costs (like depreciation) and variable expenses (like fuel) that they incur while driving their own car for work. Reimbursement programs are leaner and more agile than fleets; and they can be tax-free, which distinguishes them from traditional car allowances.
Why do companies use program standard vehicles?
A program standard vehicle is a way for companies to standardize reimbursements. If you have a driver population of one hundred, five hundred, or one thousand drivers, it is physically impossible to reimburse every driver based on their specific car.
Every car has different fuel and repair costs, insurance, depreciation rates, etc. You would need to employ just as many administrators as drivers, constantly calculating driver reimbursements.
Can you have more than one standard?
When companies have large driving forces, they select more than one program standard vehicle, because their drivers often have different needs. The car that a territory manager needs to make a sales call in rural Kansas is not the same as their colleague needs in downtown Dallas.
What does the IRS have to do with program standard vehicles?
The IRS allows reimbursements to be paid tax-free, since for certain workers—especially sales teams—it is necessary to drive a car for work. IRS regulation acknowledges that it is reasonable to reimburse employees when they drive their personal car for work.
Every year, the IRS sets a new ceiling for reimbursable vehicle MSRPs. The ceiling indicates how much a car must cost to be eligible for tax-free reimbursements. In 2022, the IRS allows a car to cost as much as $56,100. (This figure was updated with the IRS’s new 2022 standard mileage rate.)
I am a driver. Do I have to buy the program standard vehicle?
No, you do not.
When a business launches a vehicle reimbursement program, they may select a program standard vehicle that costs any amount up to $56,100. However, employees neither need to purchase that exact car, nor even a vehicle that costs exactly that amount.
The value of a driver’s actual car depends on their employer’s reimbursement program. For drivers on a FAVR program, their car must cost at least 90% of the program standard vehicle. If a company’s program standard vehicle has an MSRP of $50,000, employees must buy cars that cost at least $40,000.
This is the rule because vehicle reimbursements are meant to cover the real cost of driving. They are, of course, not meant to be used as clandestine bonuses. If, however, you are on a Tax-Free Car Allowance (TFCA), there is no requirement that cars cost 90% of the standard. The Tax-Free Car Allowance is a flexible program that has fewer compliance measures than FAVR. For companies whose drivers have older and cheaper cars, this program is ideal.
The tax efficiencies of a TFCA program—for both companies and drivers—are still considerable, and employees are not forced to buy a car beyond their means.
How do you get a program standard vehicle?
The best way to do this is by outsourcing your vehicle program to a software provider. When you are looking for one, ensure that their software includes a wide selection of program standard vehicles to choose from.
Remember, you can have multiple standards on one program, to accommodate different driving needs. There are lots of other reasons to outsource your vehicle program as well. If you want to learn more about mileage reimbursement software, I recommend these two articles next:
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