Business Vehicle Services FAVR Guidelines
GUIDELINES FOR ESTABLISHING A NONTAXABLE (FAVR) PROGRAM UNDER THE RUNZHEIMER PLAN OF AUTOMOBILE STANDARD COSTS HOW THE PLAN WORKS The Internal Revenue Service s Revenue Procedure 2010-51 clearly spells out how organizations can establish and administer nontaxable business automobile reimbursement programs based on fixed and variable payments to drivers. This FAVR wording was first released in 1990 as Revenue Procedure 90-34. This Revenue Procedure is meant to help organizations, electing to use a Runzheimer Plan, set recordkeeping and administration guidelines so that they can benefit from a nontaxable reimbursement program. Recordkeeping Requirements As most taxpayers know, the time taken with a reasonable recordkeeping process can lead to a lower tax burden. Because using FAVR is an option, organizations need to understand and follow the recordkeeping steps provided by Revenue Procedure 2010-51. 1) To qualify for a FAVR program, a driver needs to complete an information form (Runzheimer can provide an example). This form needs to be on file in your offices 30 days after the driver enters a program. A small amount of updated information is then needed from each qualified driver by January 31 each year. Though you can create your own form, it must include the following information: a) Make, model, and year of vehicle used for business by the employee. b) The current business vehicle s odometer reading (and the final odometer reading of any previous vehicle--if under a FAVR plan previously). c) Proof of vehicle insurance, which equals or exceeds reimbursement plan standards. d) The vehicle s purchase price (when new, including taxes). e) Whether the employee has claimed depreciation on the vehicle other than through the straightline depreciation method. 2) The company must regularly collect and track the business mileage (including date, place, and purpose) reported by employees as they seek reimbursement through the variable (operating) factor under The Runzheimer Plan. Other reimbursements received by employees must also be tracked. It is our opinion this should be done on a quarterly basis as a minimum. 3) The company must inform each driver within 30 days of the end of each calendar year of the depreciation reimbursement received annually.
Other Major Requirements Under FAVR In addition to recordkeeping, there are a number of other specific vehicle and eligibility requirements for a FAVR program which you should review in relation to your Runzheimer Plan. Standard Vehicle Pricing Each FAVR program developed has a standard base vehicle. The cost of this base vehicle is calculated using Runzheimer data and parameters selected by the client. FAVR rules require that the program vehicle cost may not exceed 95% of the retail dealer invoice cost. Notice 2018-03 released by the Internal Revenue Service for 2018 states that the total cost (including Sales Tax) may not exceed $27,300 for automobiles and $31,000 for trucks and vans. See section 6.02(6) of Rev. Proc 2010-51. Automobile example: Vehicle: 2018 Midsize Sedan Dealer Cost: $25,890 Freight: 885 Total: $26,775 Business-Use Percentage A driver who uses his/her own vehicle for business will also use the vehicle for personal reasons. The business-use percentage of this vehicle can be determined through two methods: time or mileage. FAVR requires that a mileage method be used to meet Revenue Procedure rules. Companies starting a FAVR program may not have adequate records to set an initial business-use percentage. In these cases, a reasonable estimate is acceptable, however, the percentage may not exceed 75%. After adequate mileage data is recorded, the business-use percentage must be supported by the data with proper adjustments made. A business-use percentage is determined by dividing the plan participants annual business mileage by total annual mileage (odometer miles). This calculation must be made each year for each FAVR plan, and the resulting percentage must be equal to or greater than the actual percentage used to allocate fixed costs. Again, the calculation is based upon all FAVR participants in each plan, not on an individual driver basis. In all cases, the business-use percentage for a FAVR program may not exceed 75%, even when the actual percentage is higher. Companies that pay a fixed reimbursement on a daily basis (rather than monthly, weekly, or bi-weekly) may wish to estimate a business-use percentage based on the number of days paid during the year--or switch to another method of allocating fixed costs. Retention Period x 95% Standard Cost: $25,436 The trade cycle established for a FAVR program may not be less than two calendar years. There is no maximum time or mileage limitation.
High Mileage Adjustment Optional payments to high-mileage drivers are considered taxable and subject to reporting and employment tax withholding and payment rules. Interest Expense Interest paid for financing a vehicle cannot be included in a nontaxable FAVR reimbursement but can be reimbursed through a separate taxable payment. Eligibility 1. A FAVR allowance can be paid only to employees who substantiate a minimum number of business mileage each year. This minimum figure will vary depending on the annual total miles and business-use percentage established in each FAVR program. The calculation for minimum mileage in each program is based upon 80% of the annual business mileage. The annual business mileage is determined by multiplying the business-use percentage by the number of annual miles in the trade cycle. For example, a company that reimburses 71.4% of the fixed costs based upon a four year/60,000 mile trade cycle (15,000 miles a year) would calculate the minimum mileage threshold as follows: 15,000 total annual miles x 71.4% = 10,710 business miles 10,710 business miles x 80% = 8,568 business mile minimum In the end, however, no driver with less than 5,000 business miles can qualify for a FAVR plan. 2. A FAVR allowance may not be paid to a control employee. The IRS defines a control employee as: A board or shareholder-appointed, confirmed, or elected officer whose pay is $105,000 or more. A director An employee whose pay is $215,000 or more. An employee who owns a 1% or more equity, capital, or profits interest in your business. 3. At no time during a calendar year may a majority of the employees covered by a FAVR program be management employees. 4. There must be at least five employees covered by FAVR programs. There could be several FAVR plans in place for five drivers. 5. A FAVR allowance may be paid only with respect to an automobile that costs, when new, at least 90% of the standard automobile cost used in determining the FAVR allowance for the first calendar year the employee receives the allowance with respect to that automobile. For example: Standard Cost $24,450 x 90% = $22,005 Minimum Cost 6. The model year of the vehicle driven must not differ from the current calendar year by more than the number of years in the retention period. This means that an employee who purchases a 2018
vehicle, reimbursed from a program based upon a four year trade cycle, may operate that vehicle up to December 31, 2022 (2018 plus four years). 7. The insurance cost component must be based upon rates charged in the base locality on the standard automobile and may be paid only to an employee whose insurance coverage limits are at least equal to the insurance limits used to compute his/her reimbursement. 8. A FAVR allowance may not be paid with respect to an automobile for which the employee has claimed depreciation using a method other than straight-line.