If you’re offering a mileage reimbursement plan, you may have heard of a Fixed & Variable Plan. Let’s go over what a FAVR plan is, what tax issues it has and if it’s right for your business.
What Is a FAVR Reimbursement Plan?
A FAVR plan reimburses employees through a combination of a mileage reimbursement and a monthly allowance. It covers fixed and variable expenses by employees that are using vehicles for business purposes.
Fixed costs include things like insurance, taxes and registration fees. Variable costs include expenses like oil, maintenance, fuel and more. All mobile employees need gas for their cars. But, your employees in California are paying more for it than employees in Ohio. There are many other differences between geographies.
You can find a full list of which expenses fall into which category in this IRS bulletin. A FAVR plan typically reimburses employees on a non-taxable basis.
FAVR Plan vs. Mileage Reimbursement
A FAVR Plan may allow businesses to provide a more accurate reimbursement with a team that’s distributed across many states. By tailoring a specific rate to each employee’s specific region and their actual monthly mileage, over- or underpayment is avoided. While it’s good at addressing the price differences between different geographic regions, the downside is the added complexity to a reimbursement program.
A cents-per-mile mileage reimbursement program is simpler and promotes accuracy and fairness. With this, employers track their business mileage and their employer reimburses them a set amount. On the downside, this may not be an ideal program for businesses that are managing a large scale of mobile workers in a variety of states. The system may not account for rapidly changing gas prices or adjusted for a region’s lower or higher prices.
Is A FAVR Reimbursement Taxable Income?
Reimbursements under a FAVR program are typically tax-free. Make sure you’re following the strict IRS guidelines, though.
How Can I Use A FAVR Program for My Company?
MileIQ for Teams, in partnership with AutoReimbursement.com, provides a FAVR Program that fits your needs. MileIQ for Teams can also offer a cents-per-mile reimbursement program, too. Let us handle your mileage, you worry about your business.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.