Each year, the IRS updates its rules and guidelines for non-taxable, accountable vehicle reimbursements. If your organization uses or is considering a FAVR car allowance, here's what you should know.
FAVR car allowances and IRS compliance
Over the past few years, the fixed and variable rate car allowance has gained popularity. Also known as FAVR reimbursement, this IRS revenue procedure holds a number of distinct advantages over standard car allowances, mileage reimbursements, and other common reimbursement methods.
Not only are FAVR allowances non-taxable, unlike standard allowances, but they also accurately and equitably reimburse employee vehicle expenses, unlike mileage reimbursement rates. The IRS standard business rate, for example, often over-reimburses high-mileage drivers and under-reimburses low-mileage drivers, which is a huge problem as Covid-19 continues to reduce business vehicle travel.
The challenge of administering a FAVR vehicle program is making sure to comply with the many IRS guidelines that keep the plan's payments non-taxable to the employee and the employer. There are 28 different rules an employer must follow, which can get complicated. But we'll just look at a couple of important updates for 2021.
Maximum standard auto cost for 2021 FAVR plans
One key guideline involves the cap placed on the cost of the standard vehicle used to derive an organization's fixed and variable reimbursement rates. The key distinction between the way a FAVR plan calculates driver rates and the way a traditional plan calculates them is by starting with a standard vehicle and determining expected costs for that vehicle in each employee zip code.
For 2021, the IRS has capped the cost of the standard vehicle at $51,100, an increase of $700 over last year's cap. This is a relatively minor change, but it continues to allow businesses to use new business-class autos to derive rates and encourage employees to drive relatively new vehicles while confident that the FAVR plan will sufficiently reimburse vehicle expenses.
Business mileage tax deduction rules for 2021
The same IRS publication announcing the new standard mileage rate for 2021 and the maximum vehicle cost for FAVR allowances also reminded businesses and employees that there will continue to be no tax write-off for business mileage. The 2017 Tax Cuts and Jobs Act removed this benefit to employees, and it does not expire until 2026.
This tax rule is hard on employees receiving a standard car allowance, since around 30-40% of that allowance is withheld for taxes. But for employees receiving a FAVR car allowance, there is no tax withholding, and they remain unaffected by the TCJA rule change.
FAVR car allowance rules unchanged by IRS
Some other rules that remain unchanged are the minimum number of annual miles projected for employees under a FAVR plan (6,250 miles), and the minimum reported annual mileage for employees (5,000 miles). The minimum number of employees receiving a FAVR reimbursement remains at five for an organization, and the maximum is only limited for management-level employees.
These guidelines may be found in IRS Revenue Procedure 2019-49 in greater detail. If you are currently exploring the possibility of switching from a standard car allowance or a mileage rate to a FAVR plan, don't let the complicated nature of these rules scare you away.
Most organizations that pay FAVR car allowances partner with a third-party program administrator. The savings and flexibility provided by an accurate, optimized vehicle reimbursement more than cover the expense of third-party admin.
This flexibility is more crucial than ever under the current conditions for business vehicle travel, and employees expect full reimbursement of vehicle expenses more now than ever. Several state labor codes require full reimbursement as well.
To learn more about FAVR program administration, contact mBurse today. Or receive a free comparison of the company savings and employee benefits of a FAVR plan vs. your current policy.