For anyone who drives their personal vehicle for their job, there is often the choice between a car allowance or mileage reimbursement. Before deciding on which method of reimbursement to choose, you should understand them both and know the main differences between the two.
A car allowance is a flat rate paid each month that is meant to cover wear and tear to your vehicle, gas, routine maintenance and repairs. It is important to remember that the car allowance is only designed to compensate you for the portion of your vehicle expenses you use while doing business. For example, your monthly car allowance is only meant to pay for the gas you use doing business and not gas used for personal driving.
A mileage reimbursement is an expense program that pays you based on how many miles you drive for business each week or month. The company will set a rate per mile and you will log your miles for each reporting period. Then you would fill out an expense form indicating your miles and multiply it by the per mile allowance. If the company pays $.50 per mile and you drove 1,000 miles in a week, then your reimbursement for the week would be $500.00.
The IRS Rules
If you have either a car allowance or a mileage reimbursement from your company, then you cannot write off your business miles as a tax deduction. If you do not get financial help from your company for using your car for business, then you can write off your miles in your federal tax filing based on the IRS mileage rate for that year.
Which Should You Choose?
Many companies give employees a choice between a car allowance or a mileage reimbursement. A car allowance is nice because it is a consistent amount of money each month and you could use that money to buy a new car that you would use your monthly car allowance to pay for. If you know that the job will not require consistent miles every week or month, then a car allowance would be the best choice.
If you know that you will be putting a minimum amount of miles in each week or month, then it would be best to choose the mileage reimbursement. Over time, the mileage reimbursement should average out to be more than the car allowance.
For many companies, it is cheaper to pay employees to use their personal vehicles than it would be to maintain a fleet of company cars. When you work for a company like that, you will be given the choice between a car allowance or mileage reimbursement. You should do some research to determine which is best for you based on the job requirements. If you play your cards right, you could get your company to pay for a new car while you get to enjoy that car for your personal use as well.