What is Tax Calculation and When Does it Happen?

If you want to know if your FAVR reimbursements could be taxed, you're in the right place! First, let's distinguish between Document Compliance and Vehicle Compliance.

Document Compliance

Document compliance involves ensuring that drivers upload and maintain valid documents, including:

1. Driver's License: Must be current and valid
2. Auto- Insurance Policy: The means your declarations page, which lists your insurance policy coverages (liability limits or deductibles). These liability limits and deductibles must meet your FAVR program requirements in order to be compliant.

Your company may also have specific employment policies that may call for withholding reimbursement (or removing you from the FAVR program) if document requirements aren't met.

Vehicle Compliance

Your employer sets certain vehicle criteria when they are designing the FAVR program. The vehicle details listed on your insurance documents must meet their criteria in order to be compliant. This includes:

1. Vehicle Age: Vehicle must be a certain age (e.g., 2019 or later)
2. Vehicle MSRP: The Manufacturer's Suggested Retail Price (MSRP) of your vehicle must meet a minimum threshold, such as $25,000, although this amount can vary based on your employer's specific requirements.

To determine vehicle compliance status, your vehicle's age (model year) and value (MSRP) are compared to the plan vehicle your employer has selected to build your FAVR program -- in addition to confirming that you have not previously used advanced 'accelerated' depreciation methods to claim any previous tax deductions on your vehicle (this is not typical).

Failing to meet FAVR vehicle compliance requirements does not mean you have to change your vehicle to remain in the program, but it's important to know this may lead to taxable reimbursements.

If a compliance snapshot shows that you are non-compliant, your reimbursement for that month will undergo a Tax Calculation to identify potentially taxable amounts (see below).

How does Tax Calculation work? 

Even if you are non-compliant for a given month, payments will only be 'subject to tax' if they exceed the maximum allowable "business use" IRS Standard Rate for that year. This is beneficial because in many cases, if you are a high-mileage driver, your payments will be subject to little or no tax, even if you are non-compliant!

To determine amounts 'subject to tax', reimbursements that are approved/paid during months while you are non-compliant are compared to what you otherwise would have been paid (for the same mileage totals) at the maximum allowable tax-free IRS Standard Rate. Any reimbursements approved/paid over the amount you would have received using the IRS rate should be considered 'ordinary income' (not a tax-free reimbursement) and subject to tax. But only this excess is what's considered taxable; amounts below what you otherwise would have been paid using the IRS Standard Rate are 'excluded from tax' (tax-free). Furthermore, potentially taxable payment amounts (i.e. approved/paid in months where you are non-compliant) are tested using mileage totals from an entire quarter, increasing the chances that the maximum amount will be 'excluded from tax' based on the Tax Calculation.

Here's an example:

Your company has a plan vehicle for your program that requires you to have a 2018 (or newer) vehicle with a $22,500 (or higher) original MSRP value - in addition to license and insurance document requirements.

A sales representative is reimbursed the following amounts in Q1 under his FAVR program:

• January: reimbursed $350 total for 450 miles driven in December while enrolled in a 2015 vehicle with a $35K MSRP - vehicle non-compliant with vehicle age requirement = potentially subject to tax!
• February: reimbursed $400 for 600 miles driven in January while enrolled with the same 2015 ($35K MSRP) vehicle - still not compliant with his vehicle = potentially subject to tax!
• March: reimbursed $300 for 400 miles driven in February after enrolling a new 2023 vehicle with a $28K MSRP - now the vehicle complies with company requirements = this month's reimbursement should not be subject to tax

Additionally, your insurance coverages (document compliance) were below the minimum requirement in January but you corrected this and uploaded a new policy in February (which was valid through March as well).

This means that you were non-compliant for both Document and Vehicle status in January. In February you were non-compliant only for Vehicle status, but in March you became fully compliant after updating your insurance and enrolling a newer vehicle that met the age and value requirements for your program.

Based on this scenario, the Tax Calculation for Q1 would work like this:

• Monthly Compliance snapshots revealed non-compliance in January (document + vehicle requirements) and February (vehicle requirements only). March was a fully compliant month (meaning that this final month's reimbursement is tax-free).
  
• January (450) + February (600) mileage must undergo tax calculations. To figure out what you would've gotten paid if used the IRS Standard Rate in these non-compliant months, we'll take the 1050 mileage for this period and multiply it by the IRS standard rate for that period ($0.67/mile for 2024) = this gives us $703.5.
• That's what you would've gotten under the IRS standard rate, but you were truly paid $750 ($350 in January, $400 in February).
• If we deduct what you would've received from what you were paid in those non-compliant months ($750 - $703.5) we get the amount that should be declared income and taxed accordingly = $46.5.

As you can see, only a portion of your total payments while non-compliant were 'subject to Tax Calculation' based on your total approved mileage.

If you have further questions regarding the Tax Calculation or Compliance requirements, please reach out, we'll be happy to help!

Coming soon! 
You can keep track of your taxable amounts (if any) on the "Taxes" feature in the Everlance toolbar left of your screen. 

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