The determination of a fixed allowance for variable rate (FAVR) plans involves a process where an employer establishes a consistent reimbursement amount paid to employees for business use of their personal vehicles. This allowance aims to cover expenses like fuel, insurance, and maintenance. The calculation considers factors such as anticipated mileage, geographic location, and the specific costs associated with operating a vehicle in that region. For example, if an employer projects an employee will drive 1,000 miles per month for business in an area with high fuel costs, the fixed allowance would be calculated to adequately compensate for those anticipated expenses.
Establishing a fixed allowance can offer benefits related to administrative simplicity and predictability for both the employer and employee. For the employer, it can streamline expense reporting and budgeting. For the employee, it provides a consistent income stream to offset vehicle-related costs. Historically, companies sought methods to reimburse employees fairly without the complexities of tracking every individual expense, leading to the development of standardized allowance approaches.
