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 in 2023
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.
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 2023.
Maximum standard auto cost for 2023 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 2023, the IRS has capped the cost of the standard vehicle at $60,800, an increase of $4,500 over last year's cap and almost $10,000 over the 2021 cap. With the prices of new vehicles at all-time highs, these cap increases allow businesses to use new business-class autos to derive rates and encourage employees to drive relatively new vehicles.
With such a robust basis for the vehicle allowance, employees can remain confident that the FAVR plan will sufficiently reimburse vehicle expenses.
Business mileage tax deduction rules for 2023
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.
IRS rule for minimum annual miles under FAVR plan
Some rules that remain unchanged govern the basic requirements for instituting a FAVR vehicle program at an organization.
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. To receive a FAVR car allowance, employees must drive a minimum of 5,000 miles per year for business purposes.
How to administer a FAVR car allowance in 2023
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.
Accurate reimbursements are more crucial than ever with today's high rates of inflation in vehicle costs. Employees expect full reimbursement of vehicle expenses more now than ever, and 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.