Quick Guide to FAVR Car Allowances

Written by mBurse Team Member   |   May 6, 2024 7:00:00 AM
2 min read

More and more businesses have been choosing to adopt FAVR programs over traditional car allowances, mileage reimbursements, and fleet programs. Here's a brief overview of FAVR car allowances and why they are growing in popularity.

What is a FAVR car allowance?

FAVR stands for fixed and variable rate. This type of car allowance is an IRS-recommended plan that uses localized vehicle expense data to deliver tax-free payments for the business use of a personal vehicle.

A fixed and variable rate allowance derives payments by separating out fixed vehicle costs (insurance, etc.) from variable vehicle costs (fuel, etc.). A typical car allowance works best for fixed costs that do not depend on how much you drive. A mileage rate works best for variable costs that do depend on how much you drive. But drivers experience both costs.

A FAVR plan works well for both types of costs. This ensures that payments accurately and fairly meet the costs of a wide range of employees, no matter where they live and work and no matter how much they drive. FAVR plans also guarantee compliance with both IRS rules and state labor codes.

What are the requirements of a FAVR plan?

To offer a FAVR plan, an organization needs at least five employees on the plan. Each employee on the plan needs to drive at least 5,000 business miles annually.

Because a FAVR car allowance issues tax-free payments, businesses have to substantiate the business use of all payments. This is typically done through a mobile app that tracks business mileage.

FAVR plans also require access to localized vehicle cost data in order to generate accurate payments that meet IRS regulations. A number of organizations specialize in providing this kind of data, which is why most businesses that adopt a FAVR plan partner with a program administrator rather than running the plan in-house.

What businesses benefit most from FAVR car allowances?

Any business that meets the size and mileage requirements can benefit from adopting a FAVR plan. Often businesses that have been providing a taxable car allowance can cut costs while providing a better benefit to employees. They do this by repurposing the 30-40% of the allowance that was going to taxes into the new program and sharing those savings with employees.

Businesses that pay a mileage reimbursement can resolve discrepancies between low-mileage and high-mileage employees and employees working in different parts of the country and facing different costs. 

If you currently pay for fuel or operate a fleet, you can remove the cost control problems that come with those programs as well as the headaches of managing personal use of vehicles and fuel.

How do you choose a FAVR plan provider?

When choosing a partner to administer a FAVR plan, there are a number of key qualities to look for:

  • Expertise with different sized companies with different types of plans
  • Ability to customize the plan to fit your organization's goals
  • A stable mobile app that is reliable with no battery drain
  • Easy-to-use mileage capture and approval process
  • Flexible architecture that allows the plan to grow with your company
  • Software integrations that fit existing systems and processes

Exploring FAVR plan options for your business

To learn more about how FAVR car allowances work, here are a number of resources mBurse can provide:

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