What You Need to Know
As we enter 2025, businesses that rely on employee-owned vehicles for work-related travel should b e aware of important changes in mileage reimbursement. At kliks.io, we understand the importance of staying up-to-date with these developments to ensure your company’s reimbursement practices remain compliant and cost-effective. Let’s dive into the key updates for Fixed and Variable Rate (FAVR) reimbursement in 2025 as defined by the IRS.
Understanding FAVR
Before we explore the changes, let’s briefly recap what FAVR is. FAVR is an IRS-approved method for reimbursing employees who use their personal vehicles for work. It consists of two components:
- A fixed payment to cover costs like depreciation, insurance, and registration
- A variable payment based on mileage to cover expenses such as fuel, maintenance, and tires
This approach provides a more accurate reimbursement by companies for both fixed ownership costs and variable operating expenses of the employees business vehicle.
2025 IRS Standard Mileage Rate Increase
The IRS has announced a significant update to the standard mileage rate for 2025:
- The business use rate has increased to 70 cents per mile, up from 67 cents in 2024
While this rate isn’t directly tied to FAVR, it does influence how businesses approach vehicle reimbursement strategies.
Impact on FAVR Programs
1. Benchmark Vehicle Cost Adjustment
For 2025, the maximum standard automobile cost for computing the allowance under a FAVR plan has been set at $61,200, down from $62,000 in 2024. This change may affect the fixed portion of your FAVR calculations.
2. Reevaluation of Reimbursement Rates
With the increase in the IRS standard mileage rate, companies using FAVR should review their variable rates to ensure they remain competitive and accurately reflect current costs.
3. Enhanced Value of FAVR
The 2025 rate increase reinforces the value of FAVR as a way to align reimbursement more closely with actual expenses while potentially reducing overpayments compared to flat mileage allowances.
Why FAVR Remains Relevant in 2025
- Tax Efficiency: FAVR payments remain non-taxable when compliant with IRS guidelines, offering a significant advantage over taxable car allowances.
- Geographical Customization: FAVR allows for location-specific reimbursement rates, addressing cost variations across different regions.
- Fairness and Accuracy: By separating fixed and variable costs, FAVR provides a more equitable reimbursement structure for both high and low-mileage drivers.
Implementing FAVR with kliks.io
At kliks.io, we specialize in helping businesses implement and manage effective mileage reimbursement programs. Our platform can assist you in:
- Calculating accurate FAVR rates based on the latest IRS guidelines
- Tracking employee mileage and generating compliant reports
- Adjusting reimbursement rates to reflect local cost variations
Conclusion
As we navigate the changes in mileage reimbursement for 2025, FAVR continues to offer a sophisticated and fair approach for businesses. By staying informed and leveraging tools like kliks.io, you can ensure your reimbursement program remains compliant, cost-effective, and fair to your employees.
Remember, while the IRS mileage rate has increased, FAVR allows you to tailor reimbursements to your specific business needs and employee driving patterns. As always, consult with a tax professional to ensure your FAVR program meets all IRS requirements for 2025.
