Your car allowance is being handled through what is called a "non-accountable" reimbursement plan. Basically, your employer has decided they do not want to deal with the hassel of tracking your business use and having you submit periodic expense reports. So they just add a specified amount to your salary and call it car allowance.
What you need to do is to track all your mileage (i.e. commuting, personal
and business) and auto operating expenses so you can take an auto expense deduction
on your 1040. At the end of the year you divide your business mileage by your total mileage to determine a business percentage use. Next, determine how much you spent during the year on gas, insurance, repairs, license, etc. Multiply the business percentage use times the sum of these expenses and you have the business portion of your auto expenses. You can also depreciate your automobile subject to certain limits. Use form 2106
. It will help you calculate these numbers and will ultimately direct you to placing the total busines related auto expense on your schedule A (miscellaneous itemized).
Alternatively, rather then track all the expenses, you could just multiply your total business miles by the applicable IRS
of 37.5 cents to arrive at an expense amount. This mileage rate is a standard rate the IRS will accept without requiring backup documentation such as gas receipts, etc. Generally, your actual expenses will be larger then using the mileage method.