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.

The Variable Rate Allowance Explained

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.

According to the 2018 IRS guidelines, "the standard mileage rate for transportation or travel expenses is 54.5 cents per mile for all miles of business use (business standard mileage rate)." For using an automobile in the gratuitous service of a charity, the per-mile rate is 14 cents. For medical care use, the rate is 18 cents per mile. This amount is updated on an annual basis and is increased to account for inflation. For more, see the IRS's 2018 Standard Mileage Rates.

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 fee 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 Versus 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.