One common way a company car allowance works is the company requires the employee to keep track of his business-related mileage and reimburses him on a per-mile basis. With this type of car allowance, the Internal Revenue Service does not require employer reporting of the reimbursement and the employee does not pay taxes on the money. However, the IRS does not allow the employee to claim mileage on his taxes as a deductible expense.
If the company gives the employee a car allowance without requiring he account for the miles he drives, the IRS requires the employer to report the funds on the employee’s W-2 forms as income. The employee must pay income tax on the money at his earning rate. However, the employee has the right to keep track of the actual work-related miles he drives and deduct them at the standard rate. Employees also have the option of keeping track of the actual expense of operating the car and deducting a percentage of those expenses, based on the percentage of work-related use of the car.
If the employee uses his vehicle for more miles than the employer reimburses, he is able to deduct the excess mileage. If the employer prepays mileage and the employee expenses do not meet the reimbursement, he must repay any excess to the employer for the IRS to consider the account as accountable.