The Ultimate Guide to FAVR Mileage Reimbursement
Learn how Fixed & Variable Rate (FAVR) reimbursement works, IRS compliance rules, and how to save 20–30% vs allowances in 2025.
What is FAVR Mileage Reimbursement?
FAVR stands for Fixed and Variable Rate. Unlike simple cents-per-mile programs, FAVR divides reimbursement into two categories:
- Fixed costs: insurance, depreciation, registration, taxes, license fees.
- Variable costs: fuel, tires, maintenance, oil changes — which fluctuate by geography and time.
By separating these costs, FAVR more accurately reimburses employees while ensuring programs stay compliant with IRS guidelines.
Why FAVR Matters in 2025
- IRS-compliant, non-taxable: As long as guidelines are followed, reimbursements are tax-free for employees and deductible for employers.
- Fair for drivers: Employees aren’t over- or under-compensated, unlike flat allowances.
- Cost-controlled for employers: Prevents overspending when gas prices spike or vehicles vary widely.
- Future-proof with EVs/PHEVs: New rules and energy costs make FAVR more relevant than ever.
FAVR vs Other Reimbursement Methods
| Method | How It Works | Pros | Cons |
|---|---|---|---|
| Flat Allowance | Employee receives fixed monthly payment | Simple, predictable | Taxable; unfair (overpays some, underpays others) |
| CPM (Cents Per Mile) | Paid per mile driven (IRS sets standard rate: 67¢ in 2024) | Easy to administer | Doesn’t reflect fixed costs; IRS audits risk if not substantiated |
| Company Car | Employer provides vehicle | Easy for employees, control over fleet | High overhead, liability, capital costs |
| FAVR | Combines fixed + variable reimbursement customized to driver profiles | Fair, IRS-compliant, scalable, cost-efficient | Slightly more complex to administer (software solves this) |
How to Calculate FAVR Rates
A FAVR program requires:
- Data inputs:
- Typical vehicle cost (base model, IRS-approved).
- Insurance and registration by location.
- Fuel, maintenance, repair costs by geography.
- Fixed reimbursement (monthly): Covers depreciation, insurance, license, taxes.
- Variable reimbursement (per-mile): Covers fuel, tires, maintenance, etc.
- Adjustments: IRS requires that programs be updated at least quarterly for variable rates and annually for fixed costs.
Example:
A pharmaceutical rep in California drives 15,000 miles per year.
- Fixed costs = $500/month
- Variable = $0.25/mile
If they drive 1,250 miles in a month → reimbursement = $500 + (1,250 × $0.25) = $812.50.
Compliance Requirements (IRS 2025)
To maintain tax-exempt status, FAVR programs must:
- Use a standard automobile profile (cannot reimburse for luxury vehicles).
- Have at least 5 drivers in the program.
- Limit annual mileage considered to no more than 7,500 business miles per year per driver for calculations.
- Update variable costs quarterly; fixed costs annually.
- Require documented mileage logs (e.g., via app).
Failing compliance could result in reimbursements being treated as taxable income.
Transitioning to FAVR
Steps to adopt a FAVR program:
- Evaluate current model — flat allowance or CPM.
- Collect data — average mileage, vehicle types, regions.
- Select technology partner — manual spreadsheets are impractical; platforms like Kliks automate rate updates, mileage logs, compliance alerts.
- Communicate policy to drivers.
- Launch pilot program with one team before scaling.
- Review and optimize — monitor actual savings and driver satisfaction.
Common Questions
Is FAVR taxable?
What about EVs?
Can small companies use FAVR?
How does FAVR compare in cost?
Companies typically save 10–30% vs flat allowances or CPM programs.
Conclusion
FAVR is the most accurate, compliant, and fair reimbursement model available in 2025. With EV adoption, regulatory scrutiny, and economic uncertainty, companies using outdated methods risk overpaying, facing audits, or frustrating employees.
With Kliks, you can launch a turnkey FAVR program in days — fully IRS-compliant, driver-friendly, and more cost efficient than Motus, Cardata or any of the other providers
