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Torben Robertson

5 mins

Why businesses are paying a Tax-Free Car Allowance in 2022

The Tax-Free Car Allowance is a reimbursement program for employees who drive their personal vehicle for work. It is easy and tax-efficient!


What is a tax-free car allowance?

IRS Publication 463 is a tax document based on which Cardata has designed a vehicle reimbursement program.

The Tax-Free Car Allowance (TFCA) is a tax-efficient reimbursement program that dramatically reduces vehicle program costs for customers switching from traditional allowances and fleet.

It is also a program with few compliance measures when compared with FAVR, which makes it a good option for companies whose drivers use older or cheaper cars. We call it “FAVR Light”.

On our Vehicle Program Scorecard, Tax-Free Car Allowance gets a perfect score of 9/9! Read on to find out why.

How do you administer a tax-free car allowance program?

We recommend outsourcing this vehicle program to a mileage reimbursement provider like Cardata.

Companies prefer to outsource the program for two reasons.

  1. The IRS requires that all drivers’ insurance be checked
  2. The IRS requires that the program be accountable, which means that mileage be recorded with a variety of specific information

Compliance measures

While the Accountable Allowance has far fewer compliance measures than a FAVR program, it is still a challenge to internally verify insurance and document mileage.

There are more than 100 insurers in the United States, and they all have different policies, so ensuring that every driver has the appropriate insurance is important.

Read more about what insurance you need for business driving here.

The IRS also requires that you properly account for mileage. In order to do so, you need to log:

  1. The business purpose of the trip
  2. The start and end addresses

Drivers spend many minutes performing these activities every day, if they are logging mileage manually. To save time and money, companies outsource their 4nce to reimbursement providers with mobile mileage capture apps.

In a large driver population, literally thousands of hours of mileage logging are saved every year through mobile mileage capture. Moreover, with an app like Cardata Mobile and software like Cardata Cloud, all the information that the IRS requires is conveniently stored.

Employer tax implications

When a 463 Accountable Allowance meets these compliance measures, the program can be tax-free.

Employers will only pay tax on an allowance that exceeds the standard CPM rate. This is a significant difference from a traditional allowance, where the whole allowance is taxed no matter what.

Employers can target allowances under the CPM rate if they want to be 100% tax-free, or they can target over the CPM rate to reward employees and see a bit of tax.

Employee tax implications

When compliant, and when the figure is less than or equal to the CPM rate, employees are not taxed at all on the Tax-Free Car Allowance.

That is the great thing about a TFCA: more money is left in your drivers’ pockets!

Read more: why you should never pay drivers a traditional car allowance

Employer vehicle expenses

With a Tax-Free Car Allowance, employers pay their employees to bring their own vehicle to work.

Generally, employers will pay for about 71% of their driver’s vehicle expenses, since the car is being used for work 5 out of 7 days.

Employee vehicle expenses

Employees supply and drive their own vehicle for work, and they pay for some amount of it. If the employer pays for about 71% of the vehicle’s fixed and variable expenses, then the employee pays for 29% of them.

This is a great benefit to drivers, who are in this sense able to purchase their own vehicle for less than 30% of what it would normally cost.

Read about more ways drivers win with vehicle reimbursement programs.

Driver time savings

Drivers must keep proper records if they want tax free reimbursements, so a TFCA plan administered in-house causes more work for drivers.

However, when the program is outsourced, so much time is regained. Cardata Mobile is a “set it and forget it” system that automatically tracks mileage after one initial set-up. Drivers do not have to worry about recording IRS-required data, and yet they still receive reimbursements tax-free.

Also, since there are less compliance measures than with FAVR, there are fewer things for drivers to worry about, and therefore TFCA consumes less time than FAVR.

Administrator time savings

The administrative burden of TFCA is less than FAVR. It is about equal to that of a traditional allowance. TFCA consumes fewer administration hours than fleet operations by far.

Why do CFOs like an Accountable Allowance?

CFOs are choosing an Accountable Allowance because it is more cost effective than a traditional car allowance or company owned vehicle. It also has the potential to be cheaper than CPM standard rate reimbursements—it is up to the company to decide whether they want to pay the full rate or less.

A rate below the CPM rate is usually based on regional reimbursements. Cardata uses its proprietary data sources to calculate the actual costs of driving in each region. There are dramatic differences between the costs of driving on the Gulf Coast and the West Coast, for example.

Why do drivers like Tax-Free Car Allowance?

Drivers like the Tax-Free Car Allowance because it lets them build vehicle equity. They only have to pay for about 30% of their fixed and variable vehicle expenses.

Also, because the program has fewer compliance measures, drivers can drive older and less expensive cars. With FAVR, by contrast, a vehicle is not eligible for reimbursement when it is more than 7 years old.


A Tax-Free Car Allowance could save your company thousands, tens or hundreds of thousands of dollars per year, if you are on a company-owned vehicle or traditional allowance.

If you are interested in vehicle reimbursement programs (“VRPs”), but your drivers have older and less expensive vehicles, then a Tax-Free Car Allowance is a great option.

VRP-curious? Schedule a call with us today. We have other great programs as well. Read more about:

  1. Fixed and Variable Rate (“FAVR”) reimbursements
  2. Cents per Mile (“CPM”) reimbursements

And do not forget to subscribe to our newsletter today to find out more about VRPs, industry news, and Cardata updates.

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