Fixed and Variable Rate Allowances (FAVR)
Fixed and Variable Rate Allowances (FAVR) is an IRS-approved method for employers to reimburse employees for the business use of their personal vehicles. This method can provide a tax-free reimbursement if structured correctly. The FAVR method breaks down the reimbursement into two components:
- Cents-per-mile Rate: This covers variable costs such as gasoline, vehicle maintenance, and other operating expenses.
- Flat Amount: This covers fixed costs such as depreciation and insurance related to the vehicle.
The FAVR method ensures that employees are adequately reimbursed for their vehicle expenses without those reimbursements being considered taxable income, provided all IRS regulations are followed.
Examples
- A company uses the FAVR method to reimburse employees who use their own cars for client meetings. The employees receive $0.25 per mile to cover gasoline and maintenance, plus a $200 monthly allowance for depreciation and insurance.
- An employee drives 1,000 miles in a month for business purposes. The employer provides a variable rate of $0.30 per mile plus a flat depreciation and insurance allowance of $150. The total reimbursement would be $300 (1,000 miles × $0.30) plus $150 for a total of $450.
Frequently Asked Questions
Who can use the FAVR method?
Any employer can use the FAVR method to reimburse employees for the business use of their personal vehicles, provided they follow IRS guidelines.
Is FAVR reimbursement taxable?
No, FAVR reimbursements are not considered wages and are not taxable, as long as they comply with IRS requirements.
How is the cents-per-mile rate determined?
The cents-per-mile rate is determined based on the variable costs of operating a vehicle, such as fuel, maintenance, and repair costs. The IRS publishes standard mileage rates annually, which can be used as a guideline.
Can FAVR be used for leased vehicles?
Yes, the FAVR method can be applied to both owned and leased vehicles.
What are the limits to the Fixed Amount portion?
The fixed amount portion should proportionately reflect costs related to the vehicle’s depreciation and insurance.
Related Terms
- Standard Mileage Method: A simpler method to calculate automobile expenses where a standard rate per mile driven for business purposes (determined by the IRS annually) is used instead of separating fixed and variable costs.
Online References
Suggested Books for Further Studies
- “Deduct It! Lower Your Small Business Taxes” by Stephen Fishman - A comprehensive guide to maximizing tax deductions for small businesses.
- “Tax Deductions for Professionals” by Stephen Fishman - Focused on tax deduction strategies for professionals including vehicle expense deductions.
- “J.K. Lasser’s Small Business Taxes 2023” by Barbara Weltman - Up-to-date details on small business tax deductions and strategies.
Fundamentals of Fixed and Variable Rate Allowances (FAVR): Taxation Basics Quiz
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