What is Tax-Free Car Allowance (TFCA)?

A Tax-Free Car Allowance (TFCA) is an IRS-compliant way to reimburse employees who use personal vehicles for work. It follows IRS Publication 463, which outlines rules for accountable plans—so TFCA is sometimes called a “463 Accountable Allowance.”

Under TFCA, employers set either a fixed reimbursement amount, a variable reimbursement rate per mile, or a combination of both. As long as the total payment doesn’t exceed what the employee would receive if reimbursed at the IRS standard mileage rate times their business miles, the entire amount can remain tax-free.

The Core Principle: The “Tax Test”

The main compliance requirement for TFCA is straightforward and often referred to as the “Tax Test.”

1. Track Mileage: Employees record their business miles (usually with an automated mileage-tracking tool).
2. Determine the Non-Taxable Limit: Multiply those business miles by the IRS standard mileage rate.

See the current IRS rate here: What is the IRS Mileage Rate?  

3. Compare Reimbursement: If the total TFCA payment (fixed allowance + cents per mile) is at or below this limit, it’s 100% tax-free. Any portion above that limit, “the delta,” becomes taxable income.

That’s it—no additional mileage or vehicle cost thresholds. As long as your TFCA aligns with Publication 463 requirements and you run the Tax Test, you’re compliant.

Here is an example of how the tax test functions:

• Driver 1
  
  • Drove 1,850 miles in the quarter.
  • Received $1,447.94 total from their TFCA program, but their “non-taxable limit” is only $1,211.75 for those miles (1,850 × $0.655).
  • The overage of $236.19 is taxable.
• Driver 2
  
  • Drove 3,000 miles in the quarter.
  • Their total TFCA reimbursement was $1,785.30, which is below the non-taxable limit of $1,965.00.
  • They owe $0.00 in taxes for the quarter.

How TFCA Works in Practice

1. Set Up Allowances

Employers decide on the structure: a flat monthly car allowance, a per-mile rate, or a mix of both. For example, a recent study of Beverage Distributors revealed average cents per mile rates of $0.11 per mile, and average monthly allowances of $450.36 on TFCA programs.

2. Capture and Substantiate Mileage

Employees track business trips using an app or online tool (like Cardata), providing a clear record. The things you have to include on a mileage log are somewhat numerous, so it’s better to do it by app than by paper (the old-school way). They include:

• Date of trip
• Destination
• Business purpose pf trip
• Departure odometer
• Arrival odometer
• Miles of trip
• Additional expenses
• Amount of those expenses

3. Apply the Tax Test

Each pay cycle or quarter, compare paid reimbursements against the “non-taxable limit” (miles × IRS rate). Any overage is taxed; everything else is excluded from both payroll and income tax.

The simplicity of this process is a major reason organizations adopt TFCA: it’s easy to understand, easy to administer, and easy for employees to accept.

Benefits of a Tax-Free Car Allowance

1. Straightforward IRS Compliance

Because TFCA is built around Publication 463, you don’t need to navigate extra regulations or juggle complex driver eligibility rules. The single “Tax Test” keeps you on track with minimal hassle.

2. Lower Tax Burden

Traditional (taxable) car allowances can add thousands of extra dollars in payroll taxes each year. By converting to TFCA, all reimbursements below the IRS standard rate limit become tax-free—benefiting both the employer and employees.

3. Reduced Administrative Work

TFCA’s structure only requires:

• Mileage logs (digitally automated, if preferred).
• A quick calculation to verify amounts against the IRS rate.

That’s far simpler than managing a full fleet or dealing with more complex reimbursement programs.

4. Employee-Friendly

Employees can use their own vehicles, choose models that fit their needs, and know they won’t lose money on work-related driving expenses. Meanwhile, the monthly allowance portion (if you choose to offer one) gives them predictable income, with tax-free benefits.

TFCA in Context: How It Differs from FAVR and CPM

While TFCA is a great “one-rule wonder,” some organizations consider alternative programs. Here’s a brief look at how TFCA differs from FAVR and Cents per Mile (CPM).

Fixed & Variable Rate (FAVR)

A FAVR program uses detailed regional data to pinpoint employees’ actual fixed costs (e.g., depreciation, insurance) and variable costs (e.g., fuel, maintenance). It can reimburse above the IRS standard rate, tax-free, but only if the business meets IRS requirements (minimum of five qualifying drivers, 5,000 annual business miles per driver, vehicle cost limits, etc.).

Because FAVR uses detailed vehicle data, high-mileage drivers rarely exceed the IRS limit—even when out of perfect compliance—while lower-mileage drivers might. This approach ensures payments closely match actual vehicle costs, but it comes with more administrative hurdles. Note, however, that with a vehicle reimbursement partner, this data can be leveraged in TFCA programs too—the difference is that you still have to run the tax test on TFCA.

Cents per Mile (CPM)

A CPM program pays employees a set cents per mile rate for their business mileage—usually at or under the IRS rate. If the rate doesn’t go above that IRS threshold, it’s automatically tax-free without extra testing. This simplicity is ideal for “occasional” or part-time drivers who drive fewer than 5,000 miles a year.

Is TFCA Right for You?

1. Your Drivers Have Mixed Mileage: TFCA is helpful if some employees drive moderate miles and want a consistent allowance, but you don’t want a heavy administrative burden.
2. You Want Minimal Rules: Compared to FAVR’s vehicle cost and mileage minimums, TFCA’s only big compliance factor is to run the Tax Test.
3. You Value Predictability: With TFCA, you can lock in a monthly rate for budgeting while letting employees log actual mileage to cover variable costs.
4. You’re Fine With the IRS Standard Rate: If you’re aiming to reimburse more than the IRS rate tax-free, you’ll need FAVR. Otherwise, TFCA’s single threshold is easy to manage.

For many employers, TFCA is perfect for middle-of-the-road or executive drivers who like a steady allowance yet only clock a moderate amount of mileage each month.

Conclusion

A Tax-Free Car Allowance (TFCA), also known as a “463 Accountable Allowance”, gives you a streamlined, flexible, and IRS-compliant way to reimburse employees for business driving expenses. The Tax Test—comparing total reimbursement to the standard mileage rate—serves as your straightforward guardrail for staying tax-free.

Compared to alternative programs like FAVR (highly detailed, great for high-mileage drivers but complex) or CPM (purely cents-per-mile), TFCA strikes a balance of simplicity, predictability, and fairness. It dramatically cuts tax waste versus a standard taxable allowance and keeps administrative requirements light.

Still unsure which approach is best for your organization? Cardata can help you design a plan that aligns with your driver demographics, compliance goals, and budget—whether that’s TFCA, FAVR, CPM, or a blended solution.

Want to Learn More?

Contact Cardata and discover how a Tax-Free Car Allowance could fit your team’s needs. With the right tools and guidance, you’ll save time, reduce costs, and ensure your drivers are reimbursed fairly—without the administrative headache.