If you’ve investigated vehicle reimbursement at all, you have likely come across “FAVR.” FAVR, which stands for “Fixed and Variable Rate”, is an IRS revenue procedure that can be used to reimburse mobile employees tax-free for both the fixed and variable costs associated with driving for business. Put simply, it is the fairest, most accurate, and most cost-effective way to reimburse mobile employees who are driving their own vehicles for work.
Fixed and Variable Costs
Perhaps the most noticeable day-to-day cost incurred by those driving for business is filling the gas tank. The costs of driving a personal vehicle for business go well beyond fuel, though. Mobile workers pay for the fixed costs of business travel, such as insurance premiums, registration and license fees, depreciation, and taxes. They also pay for the variable costs, like fuel, maintenance, tires, and oil, which all change based on mileage.
Recognizing that these costs are incurred differently – one by simply owning a car and the other by actually driving that car – a FAVR reimbursement breaks payments out into two separate rates. The fixed rate covers costs like insurance that are “set” regardless of business mileage, while the variable rate covers the costs that depend on distance traveled.
Seems relatively simple, right?
Well, to complicate things a bit, both fixed and variable costs can vary greatly depending on an employee’s location. Case in point: yearly vehicle property taxes are not the same in every state. In Virginia, for example, property taxes average $962, while they average just $85 in Montana. That’s an $877 difference per year, and if you consider other vehicle costs, the impact of geographic variances can be quite substantial.
Insurance premiums vary widely, from as much as $2,476 in Michigan to $805 in Maine (a $1,671 difference). Registration fees also differ by state, costing just $14 in Mississippi yet $101 in Illinois. Add on fuel prices, which vary not only by state, but also by day, and these differences in cost can become an administrative nightmare for companies with a widely-dispersed mobile workforce to track.
Making FAVR Programs Possible
Fortunately, new technology providers, like Motus, have made it easier than ever to provide a cost-effective FAVR program. We offer a mileage tracking app which seamlessly integrates with vehicle reimbursement to make mileage reporting and expense reimbursement easier for mobile workers and their managers.
Our platform accounts for the various costs that employees incur when driving for business, updates employees’ reimbursement rates based on changes in costs, and manages the payment process. As a result, your company can provide the most accurate reimbursements to your mobile employees, without taking on the administrative burden once associated with providing FAVR programs.