How Do Car Allowances on Taxes Work?


Quick Answer

The IRS taxes flat-rate car allowances as regular income because mileage is not recorded and there are no regional variations in the rates, according to Car Data. It also permits taxpayers who declare flat-rate car allowance income to deduct all business miles traveled at the standard IRS per-mile rate, notes Cars Direct. Maintenance costs are also tax deductible, provided the vehicle is primarily used for business. These deductions often offset car allowance income.

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Full Answer

When a car allowance is combined with a fuel card, gas charged to the card for business miles is non-taxable and gas charged for non-business miles is taxable, explains Cars Direct. Maintenance and repairs charged to the card are non-taxable in proportion to the percentage of miles that are related to business. Mileage reimbursement is non-taxable except for amounts above the IRS standard per-mile rate.

For employees with company cars, the IRS assesses a tax for any personal use, explains Car Data. If the company charges the employee a personal use fee, the tax is offset by that amount. This applies to vehicles that the company owns and leases.

Fixed and variable rate reimbursement plans, which reimburse employees for actual business expenses, are non-taxable, notes Runzheimer International.

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