How Does an Auto Allowance Affect Income Tax?

If an employer sets up the auto expense account as an accountable plan, the employee does not pay any taxes on the reimbursement or allowance, according to TurboTax. The Internal Revenue Service requires the employee to return any excess allowance to the employer within a reasonable amount of time with this type of plan.

Some employers set up auto expense plans without requiring the employee to account for mileage or expenses. If the payments do not fit the criteria for an accountable plan, the employer must report the funds on the W-2 form warns TurboTax. Under this type of plan, the employee pays taxes on the funds just as he does for his wages, but the IRS allows claiming mileage for work-related mileage or expenses from the use of the vehicle.

The IRS has two methods to account for the expenses of operating a vehicle for work-related expenses, reports TurboTax. The easier of the two methods is to keep track of the mileage and multiply the total number of miles by the IRS standard mileage rate for the time the employee used the car. The second method requires the employee to keep every receipt for auto expenses. It allows deductions for garage fees, tolls, gasoline, depreciation and tires. However, when filing taxes, the employee must multiply the total of the expenses by the percentage of miles that are related to business use of the vehicle.