Hello again london,
There are basically two types of expense account plans -- accountable and non accountable. An accountable plan is when you turn in actual receipts to your employer and they reimburse you for your actual expenses. A non accountable plan is when your employer simply pays you a flat amount each month to cover your car expenses, regardless of what your actual expenses were, and receipts are not required.
An employer who pays expenses under an accountable plan is not required to report those amounts as part o the employee's taxable wages. However, amounts paid to you under a non accountable plan are required to be reported to you as taxable income.
It sounds as though your employer was paying you a mixture of both types of payments, so it may be difficult to separate out those expenses. However, if the employer reports all of these expenses to you as taxable income, even though you will be required to include this in your taxable income for the year, at the same time you can deduct your actual expeneses. You will need to file Form 2106 with your tax return which is used for non reimbursed employee expenses. On that form you will list the actual expenses which you had for the business use of your vehicle minus any NON TAXABLE reimbursements you received. Since your employer plans to include these expenses as part of your taxable income, then essentially they have not reimbursed you for your expenses, so even though you will need to include this amount in your income, you will turn around and claim a deduction for your actual expenses on Form 2106.
By doing this, you should basically eliminate all or at least most of the amounts that were reported as taxable income.
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Thank you london