While your employee uses their own or a leased vehicle for work.
FAVR nontaxable payments must be made to the business driver at least quarterly. The IRS writes the rules for this. The rules cover restrictions on how the vehicle is used and how much it is used, as well as a lot more details. Geographic region and driving territory are part of the plan.
For the business owner, this can be considered to be the most cost effective method of paying for transportation allowed by the IRS. The divided plan of Fixed and Variable costs allow the plan to be more accurate that a straight mileage figure. This system, luckily for a business owner, is not a drain on capital.
Feel that the FAVR plan is a step better than fleet vehicles, IRS mileage rate and flat car allowances as it is more specific in cost accounting.
A large company did a series of comparisons between FAVR and their Fleet services and decided to keep their fleet services. Not totally for a financial reason.
They liked the look of the fleet vehicles and the image that it gave their company. That is not the most common opinion of the FAVR plan.
It isn't wise to underpay the owner of the vehicle for the vehicle's service to the company as the driver will not tolerate that in most cases. So this method is more specific to the actual costs.
This plan can save a company about $2,000.00 a year against what they paid for the money per mile method for a driving employee. Some employees who drive a lot of miles per week can fudge the money per mile system by adding in their own miles for home use and cost the company a lot of cash.
Let me explain FAVR or the Fixed and Variable Rate Plan in more detail.
Firstly let 's talk about a Fixed and Variable rate and what it means.
There are two types of payments allowed by the IRS for this.
- Periodic Variable payments
- Periodic Fixed payments
Periodic Variable Payments
This payment covers the costs of operation such as regular routine maintenance, tires, oil change gasoline etc.. Keep tract of these costs.
The periodic fixed payment
Covers the cost of owning and operating your vehicle. Some of the costs are Taxes, Insurance and Depreciation, etc. Keep tract of these costs.
First you add both of the costs of doing this for the period then divide the cost by the same ratio that was used mileage wise for your business or work.
Example: Joe drove 200 miles for business and the car actually had gone 300 miles. So Joe can tack on 2/3 of the cost of operation for the 300 miles to the Periodic Fixed
Employer controls vehicle types
The employer can control the cost etc of the various vehicles that participating employees own.
Save money and time to administer this plan.
If your company has a fleet of vehicles to operate and pay for, this FAVR method can save the company money.
You could sell the vehicles that you allow your drivers to use, and use the FAVR system with vehicles that they own.
You as the business owner will no longer be liable for any lawsuits due to a bad driving error. That holds as well for employees driving the same car that they use for the company when they are out partying for the night and crash into a crowd of people. You don't get sued. The driver does.
This takes away your income tax reporting, and FICA tax liability for vehicles use, and it reduces your capital drain. You don't have to buy a new vehicle when the driver gets in an accident. Your costs remain somewhat level, and over-payments are less common.
See the other pages on this site for more specific information.