Car Allowance Definition

• A car allowance is a specific type of employee benefit companies give to employees to compensate them for the use of a personal vehicle for business purposes. Its purpose is to pay for costs like fuel, oil changes, tire wear, repairs and maintenance. Like other employee benefits, this is something that the Internal Revenue Service counts as part of employee wages. As such, companies can claim it as a tax deduction.
  
  

Deduction vs. Capitalization

• Companies cannot directly deduct all expenses related to their operations from their taxable income. For instance, capital expenses are not usually fully deductible for the year in which companies incur them. Unless the purchase of a piece of capital results in its sale during the same year, the company may only claim deductions as capital assets depreciate in value. However, wages and benefits that companies pay to employees, like other regular expenses such as rent and utilities, are not capital expenses. For this reason, a company may claim deductions for employee vehicle allowances immediately.
  
  

Employees Without Benefits

• If employees do not receive allowances for the use of personal vehicles in business capacities, the Internal Revenue Service allows them to claim their own deductions. As of 2011, the Service allows employees to claim 51 cents per mile that they drive for business purposes. However, this does not include the daily commute to and from the workplace.
  
  

Alternative

• Instead of giving employees car allowances, some companies provide employees with company cars. As this typically counts as an ordinary and necessary business expense -- as long as the employee actually uses the car for business purposes -- it can be a tax deduction for companies. However, this deduction must come as a capital expense, and the company must claim the deduction through depreciation.