As your business evaluates business vehicle plan options for 2021, adopting a fixed and variable rate reimbursement, also known as a FAVR car allowance, should be high on your list. Find out why we think this plan offers unique opportunities after a rocky 2020.
What is a FAVR reimbursement, or FAVR car allowance?
FAVR is a tax-free way to reimburse employees for the business use of a personal vehicle. The name stands for "fixed and variable rate." A FAVR plan acts like both a mileage reimbursement and a car allowance, combining the best elements of both approaches.
Our Ultimate Guide to FAVR explains in-depth how the fixed and variable rate approach works. For now, let's just say that it's the most accurate approach to offsetting employees' vehicle expenses. This is because FAVR payments derive from actual expense data for an employee's zip code and territory size.
No matter how much or how little an employee drives, they will receive an equitable reimbursement. This flexibility is not true of standard mileage rates or standard allowances. But this flexibility is a must for 2021 because of the ways COVID-19 has affected business vehicle travel. Most importantly these payments are TAX-FREE to both the employee and the employer.
Why adopt a FAVR vehicle plan in 2021?
Unique opportunities for savings, flexibility, and sustainability exist for business that switch to a FAVR vehicle plan from any of the following alternate business vehicle plans:
- Traditional car allowance
- Cents-per-mile reimbursement using the IRS rate
- Company car program
- Any of the above plus a fuel card/reimbursement
If you currently offer a car allowance, FAVR allows your organization to cut out taxes that currently eat up 30-40% of the employee's vehicle allowance. By going tax-free, you can leverage the savings into a better benefit to employees at a lower cost.
For businesses that reimburse mileage (particularly at the IRS standard business rate), switching to FAVR allows you to prevent cost overruns while providing the flexibility demanded by the pandemic and (hopefully) post-pandemic travel conditions that business drivers will face in 2021.
Company fleets are increasingly becoming unaffordable to maintain, and a FAVR car allowance offers the best possible alternative – one that treats employees equitably and provides a transparent benefit. Similarly, if you have added a fuel card to any of these other approaches, it tends to get unaffordable, and FAVR can make a huge difference.
Another reason to consider FAVR reimbursement
Recent changes in federal tax laws and labor codes have forced businesses nationwide to explore new vehicle reimbursement options. As a result of 2018 tax code changes, employees in the spring of 2019 discovered that they could no longer write off unreimbursed vehicle expenses. In states with labor codes requiring full reimbursement of business expenses, employers faced considerable pressure to beef up their plans.
This change has particularly impacted companies that pay taxable car allowances. Their employees were accustomed to deducting their business mileage every year. Now they can't. If businesses failed to respond, they became less competitive. If they increased their car allowance, they may have faced cost overruns, creating a catch-22.
Because a FAVR car allowance is non-taxable, companies can help out their employees and save money by switching today. But even companies that pay a mileage reimbursement such as the IRS standard rate can benefit from a switch as well. Our guide explains exactly why.
What our 2021 fixed and variable rate guide covers
Our Ultimate Guide to Understanding FAVR addresses the following topics:
- Why it's called "fixed and variable rate"
- The difference between fixed and variable vehicle expenses and why you need to reimburse both
- How 2021 FAVR reimbursement rates are generated
- How tax laws impact each type of car allowance and mileage reimbursement
- Why FAVR outperforms traditional allowances, mileage rates, and fuel cards/reimbursements
- Why state labor codes are pinching traditional vehicle plans
- The IRS rules for tax-free (accountable) vehicle reimbursement programs
- The fatal flaws of using the IRS mileage rate for car reimbursements
- Why fixed and variable rate payments provide ROI and long-term cost control
- The size of organizations best suited for a FAVR vehicle plan
- How to develop, implement, and manage a FAVR program
Why you need to re-evaluate your business vehicle policy now
The unpredictable and variable travel conditions produced by the COVID-19 pandemic have made 2021 a difficult year to plan for. Will business vehicle travel return to normal once there has been widespread vaccination? Will employees and clients adjust to a long-term increase in video calls rather than face-to-face meetings?
No plan offers a more flexible approach to reimbursing employees for business use of a vehicle than FAVR. Low-mileage drivers and high-mileage drivers alike will receive payments that accurately affect their needs. A driver that drives little one month and a lot the next will also receive a flexible and fair reimbursement.
Now is a strategic time to develop a more competitive car allowance plan that avoids labor code violations and reimburses employees equitably. For most organizations, only a FAVR plan can accomplish this goal cost-effectively in the long run. Read our guide to find out why!