Can someone explain to me why some companies give cars and others just do allowances? Which is better? If a company gives me a $500 allowance, is that reported as part of my salary at tax time or is it written off somehow? If I am just using it as a work vehicle, why should I have to pay taxes into it? I guess the advantage for allowances is the company is free and clear from insurance issues? That seems a bit bogus to me. We are out there driving all types of distances and they don't have to foot the insurance bill?
A car allowance is not, on its own, taxable. It is a reimbursement for expenses you made on behalf of an employer. If you get a car allowance, keep excellent records of car usage (mileage log business vs personal) and expenses (gas, repairs and maintenance, insurance, tires, parking, car washes, purchase price of vehicle). This all goes on Form 2106 and then over to your itemized deductions. If the amount of reimbursement is less than the actual expenses, then you have a deduction on Schedule A. Consult your tax advisor for details. I've had both car allowances and company cars. Both have pluses and minuses. The company car frees up your cash; a minimal expense for personal use, but you're stuck with the company car choices. If you want an SUV or a sports car, well, then you pay for it out of your pocket. If it breaks down, the company deals with the repairs, etc. Not bad there. If you have a specific car you want to drive, the allowance is good. Some negatives in that the maintenance and upkeep of the car is on your dime. Or, if you take a job with a car allowance and already have a car (especially paid for), you come ahead cash wise (remember, you do write off the use or depreciation of the car for business purposes). Stinks to have a company car and still having to make payments on that clunker you bought six months earlier and can't sell. Many companies do have rules that your business car must be a late model in good condition (so that 1992 Chevy with a humongous dent in the side may be a problem). Last job I had said that the car (with a car allowance) had to be 5 years or less with 100,000 or fewer miles. But I drove a 8 year old car with 120,000 miles and had no problems).
Another great option is a Fixed & Variable Reimbursement (FAVR) which is an IRS qualified program that allows you employer to reimburse you based on a vehicle, like a Toyota Camry or a Chevrolet Impala....or an F150 Pickup, if that is what they choose as a standard. Using that standard, a company like Runzheimer International will go out and research the cost of owning and operating that vehicle where you live and drive. The cost analysis takes into account fuel prices, maintenance and tire wear costs and reimburses them to you on a cents per mile basis for every business mile you travel and report. In addition, you receive a fixed monthly reimbursement for the cost of insurance, licensing and registration and depreciation associated with the number of miles you drive on business annually. The FAVR program is a very fair, accurate and defensible way for your company to reimburse you completely tax-free! Unlike an allowance, like $500/month, which is entirely taxable...which means you get about $350 of the $500, after taxes. Check it out...
We use Corporate Reimbursement Services (www.crsinc.com). They do very good job and run a pretty reasonable program for us. Easy to use, too.
car allowance can be taxable, it depends on how your employer does it. They may just add the amount to your pay check and then it will get taxed. If they use CRS like the previous poster said, it isn't taxed. At the end of the day, it's a perk. Take whatever works out best for you. The best paying job I had was a device job with NO expenses, I just wrote them off on my taxes. You don't get it all back, but you can get into a lower tax bracket, which for me was a good thing. If a company gives you a car, most likely they are collecting the expense of that somewhere else, ie lower commission. It's all a game.
Several problems with the FAVR. IRS requires the car must be $27, 500 or less and has to be 4 yrs old or less. You only get reimbursed on the depreciation value of the car. So if you have a $500 monthly payment . They will only reimburse you a percentage of that.
We have been using CRS for a few years now. The reimbursments are 100% tax free. Our allowance used to be taxed until switching to CRS. I think that's why we use them. We all get a different rate. Pretty sure it's because of were we live. They say that they our rate is based on where we live and how many miles they drive. Most people think it works pretty well. Hard to tell for sure, but I think the reimbursmenet is pretty close to accurate. Definitely better than a fleet program.
That's why we use CRS. They reimburse us for all our costs, including insurance. My CRS reimbursement covers all my costs. Except for my personal miles. Those are on me. But it's definitely tax free and definitely covers the business costs.
BEST ADVICE There is a lot of mis-information on this chain. People are getting confused by IRS policy vs. their employer's policy. Every program is different, based on how your employer sets it up. So you can not read what someone wrote about their rate or limitations and assume that it will apply to you. BEST ADVICE: Either call HR or simply call CRS and ask them. They will tell you EXACTLY how much you receive, what it is intended to cover, how much goes toward each cost, what (if any) restrictions apply, etc...
Re: BEST ADVICE Do companies still require a clean driving record with a car allowance as opposed to a company car?
I went with reimbursement last year and am glad I did. I bet if you ask any rep that went with CRS what they think and they'll tell you the same thing.
One thing to watch ... especially when gasoline prices go through a rapid rise (as is being speculated as a part of Dear Leader Obama's "energy policy") is that if you are on a reimbursement plan, check 1. How often is the mileage rate adjusted to determine per mile reimbursement (for gas & other expenses)? If they do it every three months, well, if gas prices jump 50c over that time, you may be paying several hundred bucks out of your pocket to go to work. 2. Most plans do make the change on a monthly basis ... is it based on the price on the 1st of the month or the 15th ... later in the month is better than earlier in the month if prices are going up. And what index of prices do they use? AAA is pretty well accepted ... but if they say the average price of gas is $3.50 and you're regularly paying $3.85, well, there's a problem. 3. Keep good records of your actual expenses. If you spent more than you were reimbursed, you can claim it as a business expense for tax purposes ... or you can use the IRS rate on your mileage, subtract the reimbursement and claim the difference (for example, if you drove 10,000 business miles and got 55c a mile from the IRS, that would be $5500. If your company reimbursed you $4800, you could claim $700 as additional vehicle expenses; same thing if you spent $5500 in cash and depreciation, were reimbursed $4800, you'd have a $700 additional deduction on your form 2106).
