Should Car Tax Allowance Be Claimed as Income or Reimbursement

January 27, 2012

In the United States, many people receive some sort of car tax allowance (or a car allowance as it is usually referred to by most people) as compensation for using their vehicle for work related purposes. Because many taxpayers can also claim a car expense tax deduction for work related driving and maintenance costs, this raises the question if this type of allowance should be treated as taxable earned income or simply a reimbursement that is not taxable.

Understanding Company Car Allowances

If your employer requires you use your personal vehicle for business related purposes, such as making deliveries, running errands or other work related purposes, the business will usually compensate for using your vehicle. In most cases, your employer will compensate you in one of two ways: a company car allowance or a mileage reimbursement plan.

Some companies choose to simply give employees a set amount each pay period for using their vehicle while on company business. The amount of the allowance is usually based on how much the company feels is fair for using your car, and is made in lieu of providing you with a company vehicle.

On the other hand, some companies may choose to simply reimburse you at a certain amount for each mile driven while on company business. Because the rate is tied to the number of miles you drive for the company, the amount you receive will vary.

Tax Ramifications

If you receive a standard car allowance from your employer, then it is generally considered to be taxable income. Conversely, monies received from a mileage reimbursement plan are generally not considered to be taxable unless the amount reimbursed is higher than the standard federal rate for mileage deductions. If the rate paid to you by the company is higher than the federal rate, then only the amount up to the allow federal limit is considered to be nontaxable.

However, even if you receive a standard car allowance from your employer, you can still deduct the standard federal rate for any miles that were driven for work related purposes. At present, the federal rate for a mileage deduction is $.55 per mile.

Other Considerations

If you are a delivery person or a salesperson for your employer, there's a good chance you drive your vehicle more for business use than you do for personal trips. If this is the case, you may be able to claim other costs for your vehicle as well. For instance, if you can document you use your vehicle primarily for work, you may be able to deduct other expenses such as fuel and maintenance costs.

If you receive a regular car allowance for reimbursement from your company for the use of your private vehicle, there are probably many types of car related expenses you can deduct from your federal income tax return. However, before you start claiming deductions, you may want to speak with a professional tax consultant to make sure deductions are valid and you are following the tax law when it comes to reporting your car allowance, and claiming deductions that offset the allowance as taxable income.

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