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Torben Robertson

3 mins

A quick guide to taxable car allowances

If your company uses a taxable car allowance system, this quick guide covers the pros, cons, and alternatives. Better (tax-free) options exist!


What is a taxable car allowance?

A taxable car allowance is a flat-rate auto allowance that is not justified with any data, mileage logs, or anything else that would allow it to be considered a tax-free benefit by the IRS.

Does your business pay a taxable car allowance to company drivers? There are better options. We have prepared this quick guide to the pros and cons of, and alternatives to, auto allowances. Read on!


1. Attracts talent because it adds to a salary (myth!)

  • Employers can increase the perceived value of the salary with a car allowance
  • (Savvy drivers know they lose out because of con #1—see below!)

2. Allows employees to choose and use their own car for business trips

  • Company-owned fleet programs prevent employees from expressing their personality through vehicle choice
  • Owning a fleet of vehicles is costly and difficult to administer

3. Compared to fleet, allowance programs are less risky

  • When employees lease or own their own vehicle, their insurance covers driving unrelated to business use
  • Company liability is reduced


1. Allowances are assessed for payroll AND income tax

  • The IRS does not consider these payments reimbursements for travel expenses
  • Drivers and employers both end up with less

2. Real driving expenses are not reflected by allowances

  • Allowances are semi-arbitrary payments made in advance and do not accurately reflect real car expenses
  • Does not draw on realtime data for payment calculations

3. Allowances can run out, which disincentivizes driving

  • Drivers who spend their entire allowance before the end of the month may cease driving, meaning less facetime with customers; ultimately, poorer customer service

Alternatives to auto allowances

1. FAVR (Fixed and Variable Rate) reimbursement plans

  • A tax-free alternative
  • All of the benefits of allowances, like empowering employees to use their own vehicle for work
  • Based on realtime, granular regional and automotive data
  • Cardata’s choice for maximizing cost savings and fostering equality

2. IRS / CRA standard rate reimbursements

  • Called “CPM”—cents per mile—these programs pay drivers 0.56 cents per mile in the US and 0.59 cents per kilometre in Canada (2021 figures)
  • A non-taxable alternative to flat rate allowances
  • Not based on regional or automotive data
  • Based instead on yearly assumptions made by the IRS (CRA in Canada)

3. Fleets of company owned or leased vehicles

  • The most expensive option
  • Might be necessary if you work with very specialized goods or services, or if all your drivers cover more than 25,000 miles per year

If you are interested in learning more, this car allowance article goes into more detail. You may also schedule an introductory call or a software demo if you would like to learn more about Cardata’s vehicle reimbursement services.

Cardata’s software suite and managed services routinely reduce vehicle program costs by 30%. Many of our clients see a 250% ROI. It takes only 8 months for client programs to pay for themselves. Cardata has been administering IRS compliant FAVR programs since 1999.

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