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FAVR Equation:
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FAVR (Fixed and Variable Rate) car allowance is a reimbursement method for employees who use their personal vehicles for business purposes. It combines a fixed monthly amount with a variable rate based on actual mileage driven.
The calculator uses the FAVR equation:
Where:
Explanation: The fixed component covers fixed vehicle costs (insurance, registration, etc.), while the variable component covers operating costs (fuel, maintenance, etc.) based on actual mileage.
Details: FAVR provides a fair and accurate reimbursement method that accounts for both fixed vehicle expenses and variable operating costs. It's more equitable than flat mileage rates and helps employers control costs while ensuring employees are properly compensated.
Tips: Enter the fixed monthly allowance amount in dollars, the variable rate in dollars per mile, and the total business miles driven. All values must be non-negative numbers.
Q1: What expenses does the fixed component cover?
A: The fixed component typically covers insurance, registration, license fees, depreciation, and finance charges - costs that occur regardless of mileage.
Q2: What expenses does the variable component cover?
A: The variable component covers fuel, oil, tires, maintenance, and repairs - costs that increase with mileage.
Q3: How often should FAVR be calculated?
A: Typically monthly, as it combines a fixed monthly amount with variable mileage-based costs for the period.
Q4: Is FAVR taxable to employees?
A: When properly structured, FAVR allowances can be tax-free to employees if they don't exceed IRS-approved rates and substantiation requirements are met.
Q5: How does FAVR compare to standard mileage rate?
A: FAVR is often more accurate and fair as it separates fixed and variable costs, while standard mileage rate combines both into a single per-mile rate.