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What is FAVR?

FAVR (Fixed and Variable Rate Reimbursement) is a mileage reimbursement method allowed by the IRS in the United States, designed to more accurately reflect the costs employees incur when using their personal vehicles for business purposes. Unlike the standard mileage rate (which pays a flat per-mile rate), FAVR separates costs into two components:

  1. Fixed Costs – These include expenses that do not change with mileage, such as:

    • Depreciation

    • Insurance

    • License and registration

    • Taxes

  2. Variable Costs – These change based on mileage, such as:

    • Fuel

    • Maintenance

    • Tires

How FAVR Works

  • Employers create a reimbursement schedule based on vehicle profiles that reflect typical usage in a given geographic area.

  • Employees are reimbursed a monthly fixed amount to cover fixed costs, and a per-mile variable rate to cover variable costs.

  • To qualify for FAVR:

    • The employee must drive at least 5,000 business miles per year.

    • The reimbursement must be based on a standard vehicle (within IRS limits).

    • The plan must comply with IRS substantiation and accounting rules.

Advantages of FAVR

  • More accurate reimbursement – Reflects actual cost structure rather than a flat rate.

  • Tax advantages – When properly administered, reimbursements are non-taxable to employees.

  • Cost control – Employers can better manage reimbursement budgets.

  • Geographic fairness – Adjusts for regional cost differences (e.g., gas prices, insurance rates).

Who Typically Uses FAVR?

FAVR is most often used by companies with:

  • Large mobile workforces (e.g., sales teams, field reps)

  • Employees who drive consistently high mileage

  • A need to manage costs while remaining IRS-compliant

    More information from the IRS