The Fixed Rate and Variable Rate (FAVR) subsidy, or Fixed and Variable Rate Reimbursement, is a way to reimburse employees who use their own vehicles or leased vehicles for work-related activities. For tax purposes, FAVR payments must be made at least quarterly, in accordance with Internal Revenue Service (IRS) guidelines, which also place certain restrictions on how and to what extent an employee's vehicle must be used to qualify for the allocation of FAVR.
Understanding Fixed and Variable Rate Allocation (FAVR)
A fixed and variable rate allocation plan may be referred to as a "mileage reimbursement plan" or a "fixed and variable plan." Reimburses employees through a combination of monthly allowance and mileage reimbursement payments.
An advantage of FAVR over a flat car/business travel allowance is that it can be tailored to each employee's location-specific costs and their actual monthly mileage. Such a system, when used properly, can prevent employee overpayment or underpayment.
The fixed and variable rate allowance includes two payment types: periodic fixed payments and periodic variable payments. The periodic fixed payment includes the fixed costs associated with driving and owning the vehicle, including depreciation, insurance, registration fees and taxes. Total costs for these costs are calculated and then adjusted to reflect the percentage of time the vehicle is used for business purposes. The periodic variable payment includes operating costs such as fuel, oil changes, tires and routine maintenance.
The IRS has set the standard mileage rate for business automobile use at 56.5 cents per mile for 2021 and 57.5 cents for 2020. For charitable use, the rate is 14 cents per mile for both 2021 and 2020. For use of health care and mobility, the rate is 126 cents per mile in 2021 and 17 cents in 2020. The amounts are updated annually to reflect variable transportation costs.
Many people find FAVR to be more accurate than the IRS standard mileage rate because it considers an employee's individual fixed and variable costs to operate a vehicle, which can vary based on factors such as vehicle type, fuel cost, and insurance. and local taxes.
Fixed and variable rate allowance: what you need to know
For a business with employees across the country, its meaning as an allowance for fuel and other expenses in Texas, where fuel is relatively cheap, may not make sense to employees in New York or California, where fuel and related costs they are comparatively more expensive.
Such price differences may include much higher registration fees and inspection costs, as well as a higher frequency of such costs and higher maintenance and repair prices on some lakes. The FAVR plan can be adapted to compensate for local price differences.
Fixed and Variable Rate Allowance vs. Mileage Reimbursement
Instead of a more
flexible but slightly more complex flat-rate allowance, some employers choose
to reimburse employees' expenses in full on a mileage-based system. Such a
system may not take into account variable prices, such as rapidly rising fuel
prices, and may not accommodate the highest or lowest prices in a region or
city, resulting in a payout excessive or an overpayment. Per thousand
reimbursement plans are the same for everyone, but FAVR's allocation plans take
into account individual employee costs.
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