Accountable allowance is an IRS-sanctioned program for employers to reimburse employees for business use of their personal vehicle. On an accountable allowance plan, detailed records of all business trips are kept to substantiate to the IRS that costs were incurred for business purposes. In exchange for this, accountable allowances are tax-free up to the IRS Standard Rate.
This means that, depending on reimbursement amounts and mileage, accountable allowances can be partially or entirely tax free.
On an accountable allowance, reimbursements are paid with no taxes deducted at source. Every quarter, each driver’s reimbursement is compared to what they would have received at the IRS Standard Rate. If their reimbursement is less than what they would have received at the Standard Rate, their entire reimbursement is tax free. If their reimbursement is greater, the difference between the two is considered taxable income.
A FAVR program is a special type of accountable allowance. FAVR programs use an IRS-approved methodology for calculating reimbursements and have additional compliance measures for drivers. In exchange for this, compliant FAVR drivers do not have their reimbursements tested for tax.
The rules regarding accountable allowance programs are outlined by the IRS in Publication 463, which details what information is required in mileage logs, how they need to be submitted, how to handle excess reimbursements, and more.
Curious to learn more? Read more about how accountable allowance programs work. If you’re looking to outsource your plan, consider running a tax-free car allowance program through Cardata — this can reduce administrative burden, help to ensure compliance, provide data-backed reports on your vehicle allowance program, and more.