FAVR Vehicle Reimbursement Explained

What is FAVR?

Understanding Fixed and Variable Rate Reimbursement

FAVR stands for Fixed and Variable Rate. It’s a type of vehicle reimbursement program that businesses use to fairly and accurately pay employees who drive their personal vehicles for work.

Unlike flat car allowances, which give everyone the same amount, FAVR programs adjust the reimbursement based on factors like location, vehicle type, and actual driving costs. This makes FAVR more precise and more compliant with IRS FAVR guidelines.

How FAVR Works

The company reimburses drivers for two types of costs:

• Fixed costs, like insurance, registration, and depreciation.
• Variable costs, like gas, maintenance, and oil changes.

Because these expenses change based on where employees drive and how much they drive, FAVR programs offer a customized, fair, and tax-compliant approach.

IRS FAVR Guidelines and Compliance

Key Rules for FAVR Programs

If a company wants its FAVR reimbursement program to meet IRS guidelines and remain untaxed, it needs to follow several rules. These include:

• Vehicle Age: The model year of the vehicle cannot differ from the current calendar year by more than the number of years in the company’s chosen retention period. This means that if a company has a retention period of, for example, 4 years, the vehicle’s model year can be up to 4 years older than the current year.
• Setting Rate and Amount: The company needs to create a mileage reimbursement policy that calculates each driver’s allowance based on real, up-to-date costs for owning and operating a vehicle in their location, like local gas prices, insurance rates, and maintenance costs. The IRS requires companies to use reliable, third-party data sources (not just guesses or averages) to make sure the reimbursement amounts are fair and accurate.

IRS FAVR Vehicle Age Compliance

Vehicle age matters because older cars have different depreciation rates and maintenance costs. By limiting the vehicle’s age, IRS FAVR guidelines ensure companies use accurate cost data that reflects typical business vehicles.

How to Calculate an FAVR Allowance

What Goes Into an FAVR Calculation?

Calculating an FAVR car allowance means adding up both fixed and variable costs. Each employee’s allowance looks a little different, depending on:

• Location (gas prices, insurance rates, and taxes vary)
• Vehicle type (a sedan costs less than a large SUV)
• Business miles driven (higher miles mean higher variable costs)

Using an FAVR Car Allowance Calculator

Many companies use an FAVR car allowance calculator to simplify the math. These tools pull in IRS data, local cost factors, and company policies to calculate fair, accurate, and compliant allowances.

Whether you calculate manually or use a calculator, the FAVR reimbursement program must stay within IRS FAVR guidelines to remain tax-free.

FAVR vs. Other Car Reimbursement Programs

Comparing FAVR to Mileage Rate Reimbursement

FAVR isn’t the only option for reimbursing employee mileage. Many businesses provide a mileage reimbursement by the IRS (or lower) rate, which gives employees a set amount (in cents per mile) for every business mile driven.

Here’s how FAVR compares to the mileage rate method:

FAVR vs. Flat Car Allowances

Some companies also offer a flat car allowance, which is a set monthly payment. While simple, these allowances are often taxable and may overpay or underpay drivers. In contrast, FAVR programs match payments to actual costs, making them more fair and cost-effective.

What About Motus FAVR Programs?

Popular Providers and FAVR Options

Many companies use third-party services to manage their FAVR plan. One well-known provider is Motus, which offers FAVR reimbursement programs alongside other mileage and fleet management tools.

While Motus is popular, some companies prefer managing their own FAVR car allowance process, especially if they already have mileage tracking software in place. This can save money and offer more flexibility.

Mileage Rate Explained

What is the Mileage Rate?

The mileage rate is the IRS-approved rate businesses can use to reimburse employees for driving personal vehicles for work. It covers both fixed and variable costs at a single, per-mile rate.

While not as tailored as an FAVR plan, the mileage rate is easy to apply and works well for companies with simpler reimbursement needs.

Final Thoughts on FAVR Programs

An FAVR vehicle reimbursement program offers one of the most accurate, fair, and IRS-compliant ways to reimburse employees for business driving. By combining fixed and variable rate payments, FAVR programs account for both predictable costs and costs that change with mileage and location. Whether you use an FAVR car allowance calculator or work with a provider like Motus, understanding FAVR guidelines and IRS compliance rules helps you build a better, more cost-effective vehicle reimbursement program.

Track Mileage Accurately with MileageWise

If your business is considering an FAVR reimbursement program, accurate mileage tracking is essential. That’s where MileageWise comes in. With its automatic mileage tracker app, built-in IRS compliance checks, team management tools, and easy reporting, MileageWise helps businesses and employees log every business mile correctly.