The fixed and variable rate allowance or FAVR provides a tax-free way to offset employee vehicle costs. This method is an IRS-compliant, cost-effective vehicle reimbursement plan.
Here are a few FAQs related to the IRS FAVR allowance, updated for 2025:
A fixed and variable rate allowance is a tax-free way to reimburse employees for the business use of a personal vehicle. This IRS revenue procedure combines periodic fixed and variable payments for accurate, localized vehicle reimbursement. The acronym FAVR is pronounced like "favor."
To properly administer a FAVR car allowance, the employer must follow a set of IRS procedures. These accounting procedures keep the program non-taxable to the company and the employees. This approach has several advantages over standard car allowances and mileage reimbursements.
While the IRS has issued several guidelines for FAVR car allowances, two are the most important:
Here's what those two guidelines mean:
Many businesses pay employees a standard allowance or standard mileage rate. With FAVR the employer calculates the rate based on a standard vehicle. This vehicle is the same make and model for all employees, regardless of what vehicle they drive.
With a national mileage rate, everyone receives the same cents-per-mile rate regardless of location. With a fixed and variable rate plan, localized costs determine rates. The employer calculates the FAVR allowance using expense data for the standard auto garaged in the employee's zip code.
The standard vehicle provides a constant, while base locality costs vary. The goal is to reimburse employees for the appropriate level of business expenses.
Different vehicles will drive expenses upward or downward (e.g. Ford F-150 vs. Toyota Prius). The actual vehicle should have no bearing on what the employer should pay, since that's a personal choice. Note that a FAVR plan does set a maximum age requirement for the employee's actual vehicle. This is to prevent them receiving a tax-free benefit on a significantly less valuable vehicle than the plan allows for.
Different locations experience different gas prices, insurance rates, and maintenance costs. Therefore, it is necessary to factor in those variations to generate an accurate allowance. Using a standard vehicle simplifies that calculation. Because FAVR is a tax-free benefit, the IRS sets a maximum value for the standard auto used to calculate a FAVR allowance. The maximum value of a standard automobile used for FAVR is $61,200 for 2025, down from $62,000 for 2024.
The fixed and variable allowance (FAVR) is a combination of fixed and variable payments. Think of it as the fixed amount of the car allowance and the variable rate of the mileage. These two payments reflect the dual nature of vehicle expenses. All drivers experience fixed and variable costs, which are reflected in the expenses covered by an FAVR allowance.
Each employee receives a vehicle reimbursement schedule that pays the business use percentage of both types of costs:
The fixed monthly payment (like a standard car allowance) covers
The variable payment (an adjustable mileage rate) covers
The combination of fixed and variable payments derived from applying base zip code costs to a standard auto makes a FAVR allowance the most accurate, transparent, and defensible vehicle reimbursement approach available.
To see why, we'll compare a FAVR plan to standard car allowances and mileage reimbursements.
A standard car allowance provides a uniform payment to all employees, regardless of their actual business use. This procedure results in taxable income for both the employee and employer. Employees who drive frequently receive the same amount as those who drive less. And employees working in high-cost areas receive the same as those in more affordable regions.
These circumstances guarantee that the allowance amount will not be fair to everyone. The employer may also be liable to lawsuits in states like California that require full reimbursement of employee business expenses. A FAVR allowance, however, is non-taxable and adjusts based on both employee mileage amounts and localized cost differences.
A typical cents-per-mile reimbursement pays a standard rate to employees experiencing different costs. The payments are tax free as long as the mileage rate does not exceed the standard business rate published by the IRS (70 cents per mile in 2025).
But the standard rate applied to different employee costs creates problems. Employees who drive a lot will receive a large payment, possibly more than they need. Employees who drive less may be under-reimbursed since fixed costs remain regardless of mileage. By separating fixed and variable costs for each zip code, FAVR solves these problems.
FAVR allowance rates are transparent, scalable, and accurate. This makes FAVR plans compliant with states that indemnify employees from company expenses. This benefit is significant for organizations with employees operating in California, Massachusetts, and other states with employee-friendly labor laws.
The IRS has issued a set of FAVR allowance rules. These rules keep FAVR a non-taxable or accountable auto reimbursement plan. The vast majority of the rules are based on data modeling.
Some of the better-known IRS FAVR rules govern:
One important rule is that a company must have at least five employees receiving the FAVR. However, there is no maximum, except for the percentage receiving it at the management level. This keeps FAVR programs scalable for smaller businesses looking to grow.
Additionally, certain FAVR requirements can be tailored to align with company goals. For instance, if a company aims to manage its image, it can set reimbursement rates that encourage the use of newer or more upscale vehicles. This approach would necessitate employees driving such vehicles.
FAVR regulations involve localized data, complex calculations, and change annually. As a result many employers have a third-party administrator design, implement, and manage the program. This trusted partner stays ahead of the tax code, provides expert guidance, and supplies helpful software.
Switching from a traditional car allowance to a FAVR plan frees up significant financial resources by eliminating tax waste. This allows an organization to improve employee benefits and reduce overall expenses all while paying a third-party administrator.
Likewise, transitioning from the IRS mileage rate saves money by preventing overpayments to employees who drive extensively. Adopting a FAVR plan can also reduce turnover caused by insufficient payments for those who drive less.
Whether you use a car allowance a mileage reimbursement, or some combination, you will face challenging questions as you seek to offset employee vehicle expenses:
FAVR resolves these quandaries and simplifies the reimbursement process for employees using personal vehicles for business purposes.
mBurse specializes in helping organizations adopt and implement the FAVR program. Schedule a discovery call or order a free FAVR plan analysis below to learn how your organization and its employees could benefit.