How Taxes Work with FAVR

Compliant drivers (meeting vehicle age requirements, insurance minimums, and driving at least 5,000 business miles per year) receive 100% tax-free reimbursements.

Out-of-compliance drivers may have a portion of their reimbursement taxed. Kliks reviews this monthly to determine whether any amount is taxable.

Why does this happen?

The IRS sets a “safe harbor” cents-per-mile (CPM) rate each year.
If your total FAVR reimbursement for the month exceeds what you would have received under the IRS CPM rate, the difference may be taxable.

Example 1: Tax Liability (February, 500 miles)

  • FAVR Reimbursement:
    $407 (fixed) + $100 (variable: $0.20 × 500 mi) = $507

  • IRS CPM Equivalent:
    500 mi × $0.655 = $327.50

  • Difference:
    $507 – $327.50 = $179.50 taxable

✅ John owes income tax on $179.50 for February.

Example 2: No Tax Liability (March, 1,000 miles)

  • FAVR Reimbursement:
    $407 (fixed) + $200 (variable: $0.20 × 1,000 mi) = $607

  • IRS CPM Equivalent:
    1,000 mi × $0.655 = $655

  • Difference:
    $607 – $655 = –$48 (no tax)

✅ No tax is owed for March, and the –$48 reduces John’s prior taxable amount.
Year-to-date tax liability: $179.50 – $48 = $131.50

Bottom line

Being out of compliance doesn’t automatically mean you’ll owe taxes.
It simply depends on whether your monthly FAVR reimbursement exceeds the amount allowed under the IRS CPM rate.

Learn more