Fixed and Variable Rate Allowance (FAVR)

What Is the Fixed and Variable Rate Allowance (FAVR)?

The fixed and variable rate allowance (FAVR), or fixed and variable rate reimbursement, is a way of reimbursing employees who use their own or leased vehicles for work-related activities. For tax purposes, FAVR payments must be made at least quarterly, according to Internal Revenue Service (IRS) guidelines, which also imposes certain restrictions on how and how much an employee's vehicle must be used to qualify for the FAVR allowance.

Understanding the Fixed and Variable Rate Allowance (FAVR)

A fixed and variable rate allowance plan may also be referred to as a "mileage reimbursement plan" or a "fixed and variable plan." It reimburses employees by way of a combination of a monthly allowance and mileage reimbursement payments.

An advantage of a FAVR over a flat car/business travel allowance is that it may be tailored to each employee's location-specific costs and their actual monthly mileage. Such a system, when properly deployed, can avoid over- or underpayment to employees.

A fixed and variable rate allowance includes two payment types: periodic fixed payments and periodic variable payments. The periodic fixed payment includes fixed costs associated with driving and owning the vehicle, including depreciation, insurance, registration fees, and taxes. The total costs for these expenses 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 use of an automobile at 56.5 cents per mile for 2021 and 57.5 cents for 2020. For charitable uses, the rate is 14 cents per mile for both 2021 and 2020. For medical care use and moving, the rate is 126 cents per mile in 2021 and 17 cents in 2020. Amounts are updated annually to reflect changing transportation costs.

Many consider FAVR to be more accurate than the IRS standard mileage rate because it considers an employee’s individual fixed and variable costs for operating a vehicle, which may vary depending on factors such as the type of vehicle, the cost of fuel and insurance, and local taxes.

Fixed and Variable Rate Allowance: What to Know

For a company that has employees across the country, what makes sense as an allowance for fuel and other costs in Texas, where fuel is relatively cheap, may not make sense for employees in New York or California, where fuel and related costs are comparatively more expensive.

Such pricing differences may also include far higher registration fees and inspection costs, as well as a greater frequency of such costs, and higher maintenance and repair prices in some locales. A FAVR plan may be tailored to offset local pricing differences.

Fixed and Variable Rate Allowance vs. Per-Mile Reimbursement

Rather than a more flexible but somewhat more complicated fair and variable rate allowance, some employers choose to reimburse employee costs entirely under a mileage-based system. Such a system may not account for changing prices, such as quickly rising fuel prices, and may not be customized to the higher or lower prices of a region or city, leading to over- or underpayment. Per-mile reimbursement plans are one-size-fits-all, whereas FAVR allowance plans consider an employee’s individualized costs.