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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Car Allowance

Customer Question

I currently a sales person for a company. They give me an car allowance of $400 a month for mileage, parking, etc., etc., The allowance they are providing me is less than what I expense when visiting my clients etc. I want to know if they can tax this allowance and If i can claim additional expenses on my return. Please help.
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.
Assuming you do not have to account for the allowance to your company (i.e. you don't report mileage, etc.) they will include it on your W-2 or 1099 as taxable ordinary income. You may deduct your associated costs on Schedule A as a miscellaneous itemized deduction if they W-2 you, or on Schedule C as auto expense, parking, etc. if they 1099 you.

You may use actual expenses or use the mileage at 37.5 cents per mile in 2004.
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: They have included my car allowance on my W2 and was taxed. Why is this taxed and if they allow me to use actual(I highly doubt it) then why is that not taxed? Is it because it is a reimbursement? Also, What do you mean by Associated Cost on Sch A? Thank you once again.
Expert:  Christopher Phelps replied 11 years ago.
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 mileage rate 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.

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