What Percentage Of An IRS Car Allowance Is Gas?

Introduction

What percentage of a car allowance approved by the IRS is gas? Many variables factor into the amount you may receive for a car allowance. The gas price is just one of these, although it is more heavily weighted than some of the other variables. This article will explore some typical car allowances approved by the IRS and discuss whether or not there are any stipulations from the IRS on how much of a car allowance can go towards gas.

IRS Car Allowances: What Are They?

Car allowances are any sort of supplementary pay in the place of a company car. Because operating fleets of vehicles is so expensive, many companies opt to save money by offering employees a car allowance. This allows the employee to drive their personal vehicle to and from workplace destinations, as opposed to driving their car to a company lot and swapping their vehicle with a company car.

What Makes A Car Allowance Legitimate In The Eyes Of The IRS?

Expense reporting and accountability are what make a car allowance legitimate. In the eyes of the IRS any car allowance will be subject to tax unless special conditions are met. It is considered income unless you (or your manager) take the time to design a car allowance that meets the IRS rules for “accountable programs.”

The IRS offers business owners several options – such as FAVR – to take advantage of their tax-free car allowance programs. This saves businesses money by eliminating their fleet maintenance costs, and it protects employees from paying additional tax on their income or moving into a higher tax bracket.

What Factors Determine The Amount Of A Typical Car Allowance?

There are a few factors that typically influence the amount that the IRS permits for car allowances. Historically, the most common factor is the national price of oil and gas. However, FAVR car allowances allow businesses to adjust for local fuel prices. FAVR is a geographically sensitive program.

If you do not track mileage or expenses in any way, any amount of car allowance you pay out will be taxable. Conversely, suppose you have met the IRS conditions for a tax-free car allowance. In that case, you may require employees to track their expenditures meticulously and return all receipts for gas purchases accumulated over the year.

What Percentage Of A Car Allowance Can Go Towards Gas?

The answer to this question will depend on the response to the next one, which is: what type of car allowance program do you have?

We’ll review the four most common variations and explain what the IRS says about each.

• Lump sum car allowance. You (or your employee) can spend as much of the lump sum car allowance on gas as you like, but that’s less appealing than it reads at first glance. The reason the IRS does not place any restrictions on gas for a lump sum car allowance is because they will be taxing 100% of the amount regardless.

• Cents per Mile car allowance. Also known as the IRS standard rate, this simplified formula is used by many businesses across America for its ease of use. Contrary to popular belief, there isn’t any part of this type of car allowance that is reserved for gas – the cents per mile rate is intended as a replacement rate that encompasses all the other costs of driving. While the IRS standard mileage rate is very closely tied to the gas price, the formula replaces all of the actual incurred costs of business driving.

• FAVR (Fixed and Variable Rate) car allowance. FAVR is the most administratively complex of all the car allowances that the IRS recognizes. However, because it incorporates driving cost factors like local fuel price and fixed payments for vehicle depreciation, it is the method most representative of the actual cost of driving. Gas has a specific reimbursement value on FAVR, which generally accounts for the bulk of the variable reimbursement.

• Tracking actual costs. This is the car allowance method that will reimburse 100% of your employees’ gas expenses because they will be submitting actual receipts for reimbursement.

Special Requirements For Accounting Gas Prices In FAVR Programs

FAVR car allowances save employers money, but they do require a little bit of time investment to implement. First, businesses are only eligible for FAVR programs if they have at least five employees enrolled, and each employee must drive a minimum of 5,000 miles for the year. [1]

They also must drive a vehicle that is at least 90% of the “standard” vehicle price. In a FAVR program, employees will be reimbursed a fixed amount each month and then have a variable rate paid for every mile driven. The variable rate for FAVR is different from the IRS standard mileage rate, and companies themselves set their FAVR variable rates.

How Much Does The Price Of Gas Influence My Car Allowance?

Gas prices are reflected in the cost of operating a personal vehicle for work because every mile driven represents a certain amount of fuel used. Without gas, the total mileage driven will be zero, after all, so any car allowance program that offers some sort of mileage-based reward will automatically factor in the price of gas, if indirectly.

Tax Implications

It’s crucial to understand the sort of car allowance program you administer and what tax implications the different programs have. It’s equally essential for your employees to know what they are receiving, how much they can expect to receive each month, and if any of the car allowance will be withheld.

Conclusion

Because the price of gas is responsible for a large share of the total cost of driving, it, therefore, tends to make up a large portion of car allowance programs as well. This is especially true when the car allowance offers some sort of mileage-based reimbursement. If you’re looking to find out exactly how much your enterprise can expect to pay for gas each year, contact Cardata. We can help you calculate how much you’re currently paying for gas as part of your employee reimbursement program and explore alternatives to lower your tax burden.

Sources

[1] Rev. Proc. 2000-48 | Internal Revenue Service

Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants nor agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.