Is a Car Allowance Taxable?

If a taxpayer receives an advance or allowance for a car from an employer, the tax consequences depend on whether the employer uses an accountable or non-accountable reimbursement plan. Accountable plans are not taxable, while non-accountable reimbursement plans are taxable.

With an accountable plan, the employer reimburses allowable business expenses. In this case, the reimbursement is not taxable and expenses are not deductible. Under a non-accountable plan, the payment may be a fixed amount per day or month with no documentation needed from the employee. The employer generally includes this on the W-2, and the taxpayer claims the business-use expenses of the car on Form 2106, according to IRS Publication 463.