Small businesses need to be aware of the Fixed and Variable Rate (FAVR) because it’s designed to reimburse employees who drive their vehicles for business. Most companies use the more familiar IRS business mileage standard, but FAVR presents another more precise option.
Small Business Trends contacted Craig Powell, Motus CEO, to dig deeper into how this rate can benefit small businesses. He started by giving us a high-level overview of what FAVR is and what it does.
What is FAVR and Why is It Important
“Fixed and Variable Rate (FAVR) is an IRS revenue procedure (2010-51) that was designed to reimburse employees tax-free for both the fixed (insurance, license and registrations fees) and variable (fuel, maintenance) costs associated with driving for business,” Powell wrote.
“There is a general lack of awareness around FAVR since most companies reimburse their workers using the more commonly known IRS business mileage standard, which is used to calculate the deduction for operating a personal vehicle for business purposes.”
How Does FAVR Differ from IRS Mileage Standards
Powell went on to describe how FAVR recognizes that driving your own car for business makes for a different set of costs than driving a company vehicle.
He describes how this rate breaks down all the calculations for reimbursement into fixed and variable categories. It’s more specific and takes into account the fluctuations in business cycles too.
Why is FAVR More Accurate
“FAVR is the most accurate reimbursement solution because it provides a customized reimbursement to each mobile employee based on their local costs and business mileage, which can vary month to month.”
What are Some Other Advantages
Another advantage to using FAVR is the fact that the IRS business mileage standard can make mistakes when reimbursing employees because the costs can actually fluctuate on any given day. The existing business mileage standard runs the risk of over/ under reimbursing employees.
One of the problems with the IRS standard is it doesn’t use real-time data but average from past numbers. Powell explains:
What are the Problems with IRS Mileage Standards
“The IRS standard is a point-in-time average of costs which is determined using data from previous years, not an actual reimbursement rate. Employees could be spending more on travel than they’re being reimbursed for — or on the flipside, could be over-reimbursed if gas prices have fallen.”
One of the big problems here is in the fact there aren’t any adjustments made for reimbursement because the data is being used is from the previous year.
What are the Consequences for Inaccurate Reimbursement
“FAVR, on the other hand, allows companies to account for the full range of costs for driving for work, so employers can tailor reimbursements specifically to each individual employee,” Powell writes.
On another level, there are some other consequences for inaccurately reimbursing workers. Small businesses can lose thousands of dollars yearly according to Powell, and there’s even the danger of class action lawsuits.
What Kinds of Small Businesses will Benefit
“States often have strict employee-protection laws that outline specific requirements for expense reimbursements or deductions (such as New Hampshire, Montana and California Labor Code Section 2802),” he writes.
These laws have formed the basis for numerous class action lawsuits and multi-million dollar settlements by workers for inequitable reimbursement practices (see RadioShack, Starbucks, and Uber as examples).”
It all sounds good, but what kind of small business will get the most from using these flexible rates?
What are the Specific Requirements
FAVR does have some specific requirements that small businesses will want to pay attention to. Namely, it’s for any company that has mobile workers driving more than 5000 miles for business on a yearly basis.
That could include a range of sales executives who need to drive to their clients for pharmaceutical companies. Small business consultants as well as home healthcare companies and even nurses who make patient visits are all other examples.
How can FAVR Help with Growing Demand
Simply put, it’s a great way for getting more specific about these costs and Powell adds some other industries to the mix.
“FAVR is, and should be, an effective tool for restaurants and food franchisees who have faced a growing demand for faster delivery service.”
How to Speed Up the Process
Finally, Powell points out that while the IRS lays out the framework for collecting the data under FAVR, there are a few simple tips to speed the process along and make it all more user-friendly.
“Companies can now leverage GPS-enabled smart devices, cutting-edge software, and comprehensive vehicle management solutions to track, collect and store all of their employees’ business travel information, which can then be reported to the IRS without creating mountains of paperwork.”
It’s much more efficient for small businesses to use mobile apps to track mileage and make distinctions between business miles, commuting and personal trips than trying to keep paper logs.
Photo via Shutterstock
This article, “What is FAVR and Why is It Important for Small Businesses?” was first published on Small Business Trends