FAVR (fixed and variable rate) allowance
An IRS-approved way to pay employees for driving their own car: a fixed payment for ownership costs plus a per-mile payment for running costs, both based on local prices.
In short
- Two payments: a fixed one for depreciation, insurance and registration, and a per-mile one for fuel and upkeep.
- At least five employees on the plan, a majority not managers, each driving 5,000 or more business miles a year.
- The standard vehicle cost is capped at $61,700 for 2026 under IRS Notice 2026-10.
A FAVR allowance, short for fixed and variable rate, is the alternative to paying employees the IRS standard mileage rate. It is set out in section 6 of Rev. Proc. 2019-46 and, paid within its rules, is tax-free like a standard-rate reimbursement.
How it is paid
A FAVR allowance has two parts, each paid at least quarterly. The fixed part covers the costs of owning the car whether it moves or not: depreciation or lease payments, insurance, registration and personal property taxes. The variable part is a per-mile amount for fuel, oil, tires and maintenance. Both are worked out from prices where the employee lives and drives, which is the point of the method: an employee in an expensive region is paid more than one in a cheap one, where a single national rate over- or under-pays.
Who can use it
The rules are strict. The employer must have at least five employees on FAVR at all times, and a majority of them can't be managers. Each employee has to substantiate at least 5,000 business miles a year, or 80% of the plan's annual business mileage if that is higher. The car's cost when new has to be at least 90% of the plan's standard automobile cost, and the IRS caps that standard cost each year: $61,700 for 2026 under Notice 2026-10, and $61,200 for 2025. Optional high-mileage payments on top of the allowance are wages. The IRS mileage rate page compares FAVR with the standard rate.