A Q&A That Gets the VRP Discussion Rolling
You have questions about vehicle reimbursement. CarData Consultants has answers. And we thought we would provide a set of frequently asked questions to get the conversation started. Our team is ready to explain how we can help you better manage vehicle reimbursement expense, reduce risk and cut down on administration. Just call us and one of our team members will be happy to walk you through the details.
Q: What is a FAVR program?
A: FAVR is an acronym for “fixed and variable reimbursement.” It’s an IRS compliant non-taxable vehicle reimbursement program. A FAVR program takes into account fixed monthly expenses such as depreciation, licensing and insurance, as well as expenses that do change, for example fuel, maintenance, and repairs. A FAVR program provides reimbursement for miles driven during business use of an employee-owned vehicle.
Q: What is the IRS Standard Rate, often called a “cents-per-mile” reimbursement?
A: First, there is a similarity between the IRS Standard Rate and a FAVR program– they are both considered non-taxable. However, the IRS Standard Rate is an estimate of the “all-in” operational cost for business use of a vehicle. It does not factor in the comparative cost of geographical differences, mileage bands and vehicle depreciations. Take a look at our post on the most expensive and least expensive states to insure a vehicle and you’ll get more insight.
In addition to the inequity created by using a single rate for all drivers, it can lead to overpayment and underpayment. Underpayment happens when the driver rarely drives, it’s only natural for someone to be reluctant to use their car when they know the cost for doing so will come out of their pocket. Conversely, overpayment happens when drivers use their vehicle so much that the reimbursement rate can cover the cost of a brand new vehicle at year end.
Setting a single rate can encourage “driving for dollars,” whereby drivers can increase reimbursement simply by getting on the road, regardless of whether doing so was productive.
Q: What are other vehicle programs?
A: Some other programs include the company car, company-leased vehicles, flat monthly payments (an allowance), and flat monthly payments or a company car plus a fuel card. With company cars and company leased vehicles there is a taxable benefit: with flat payments the reimbursement is considered income and taxed accordingly. If you are using any of these, switching to a FAVR program can reduce tax waste and create fair and equitable compensation for the company and employees.
Q: We have been using the honor system for years. Why should we switch now?
A: The honor system is where a driver manually tracks their mileage for reimbursement. Manually tracking and reporting mileage is time-consuming and even with the best intentions, a degree of guesswork is inherent when a salesperson turns their attention to logging their miles for the day, week or even month.
Q: If an employee can choose the vehicle they want to drive, what’s to stop them from choosing them a very expensive one?
A: Nothing. One highly appealing element to a FAVR program is that employees can own any vehicle they desire. The business reimburses based on a standard vehicle profile, not the employees personal vehicle. This allows employers and employees a wide range of options.
Q: How can I make sure the VRP we have is meeting our business needs as those needs change?
A: Cost savings and IRS compliant non-taxable reimbursements are a hallmark of a FAVR program. Annual reviews offer the opportunity to measure its performance and adjust mileage bands and profiles.
Q: What are the key ways a FAVR program will help my company?
A: First, it reduces risk. Second, offering fair reimbursement is a pro for hiring and employee retention. Third, the program management burden is off your internal team.
Q: How do we get started?
A: Get in touch with us at 1-866-550-5188, send a message to firstname.lastname@example.org or request a demo by filling out the form on our Contact Us web page. We’ll start by learning about your business and the VRP you have now and discuss ways we can help you save time and money with a CarData FAVR program.
About CarData Consultants
CarData provides precision vehicle reimbursement programs for the mobile workforce. CarData services save money, reduce risk, and remove administration. CarData programs are compliant with the IRS and the CRA procedures.