Fixed and Variable Rate Allowances (FAVR) represent an allowable method for computing a business automobile mileage allowance that is not reported as wages on Form W-2. It combines a cents-per-mile rate to cover gasoline and other operating costs, plus a flat amount to cover depreciation and insurance.
Understanding Fixed and Variable Rate Allowances (FAVR)
Definition and Structure
FAVR plans are used by employers to reimburse employees for the business use of their personal vehicles. The structure includes:
- Cents-Per-Mile Rate: This rate is designed to cover the variable costs of operating a vehicle, such as fuel, oil, and maintenance.
- Flat Rate Allowance: This is a fixed amount provided to cover the fixed costs, such as depreciation, insurance, and license fees.
Calculation
In a typical FAVR plan, the employee logs the miles driven for business purposes:
Tax Implications
FAVR payments are not included as wages on Form W-2 provided that:
- The plan meets IRS guidelines for an accountable plan.
- The reimbursement is strictly substantiated by mileage logs and other records.
- Any excess reimbursement is returned to the employer.
Historical Context
FAVR allowances were introduced to simplify vehicle reimbursement processes. Unlike traditional mileage reimbursement methods, FAVR considers both fixed and variable expenses separately for a more accurate reflection of actual costs.
Advantages of FAVR
Accuracy
FAVR provides more precise reimbursements compared to a flat cents-per-mile rate since it accounts individually for both variable and fixed costs.
Equity
Employees driving different distances or vehicles can be reimbursed in a manner that reflects their actual costs, enhancing fairness.
Control of Costs
Employers can better control and predict automobile expenses by using the FAVR method.
Comparison to Standard Mileage Method
Standard Mileage Method
Often, companies use the Standard Mileage Method to reimburse employees. This method involves a single cents-per-mile rate that covers all expenses.
- Formula:
$$ \text{Reimbursement} = \text{Mileage Driven} \times \text{IRS Mileage Rate} $$
- Less accurate since it does not differentiate between fixed and variable expenses.
FAVR vs. Standard Mileage Method
- Accuracy & Fairness: FAVR is typically more accurate and fair, as it better reflects actual costs.
- Administration: FAVR requires more administrative efforts to track fixed and variable expenses separately.
- IRS Compliance: Both methods must comply with IRS regulations to be non-taxable.
FAQs About FAVR
Q: Can all employers use FAVR? A: Any employer can use FAVR, but it makes the most sense for companies with many employees driving different types of vehicles under varied conditions.
Q: How often are FAVR rates adjusted? A: Rates should be reviewed at least annually to ensure they reflect current costs.
Q: Is detailed record-keeping necessary? A: Yes, meticulous mileage and expense records must be kept to substantiate the reimbursements.
Summary
Fixed and Variable Rate Allowances (FAVR) provide a fair and accurate method for reimbursing employees for the business use of their personal vehicles. By considering both fixed and variable costs separately, FAVR plans ensure equitable treatment and precise reimbursement, although they do require diligent administration and record-keeping. This method aligns with IRS regulations to ensure that reimbursements remain non-taxable, making it a preferred choice for many businesses with diverse vehicle needs.
References
- Internal Revenue Service, “Publication 463 (2023), Travel, Gift, and Car Expenses.”
- IRS, “Topic No. 510 - Business Use of Car.”
For more information, see also [Standard Mileage Method].
