Company Car Vs. Car Allowance

As a business grows and begins working with other businesses outside the immediate geographic region, travel is likely to become a part of the lives of some of its workers. If you need to travel for business, whether it's a simple commute to the office or frequent long-distance driving trips, a company car or car allowance can help relieve the burden.

The two main ways a business can provide its workers with access to a vehicle are a company car and a car allowance. A company car is a vehicle that the business owns and allows an employee to use. Company cars may be reserved for business purposes, or given to employees for both personal and business use. A car allowance, on the other hand, is money that the business pays an employee to cover the cost of a car or car-related expenses. A car allowance may pay for the full price of a vehicle, but most often covers the cost of gas, maintenance and normal wear and tear for employees who occasionally use their personal vehicles for business purposes.

Both types of employer-covered car expenses have distinct benefits. A company car eliminates the need for the employee to purchase a vehicle, or maintain one for business purposes. It can be a perk reserved for high-achieving employees, or a means of recruiting skilled workers and persuading them to relocate. Car allowances are easier for the employer to manage; the employer can even use a federally established mileage rate to make sure all employees who use their own vehicles for travel receive the same fair allowance.

Each option also has its own disadvantages for workers and employers. A company car that employees share requires the employer to invest in maintenance, storage, repairs and insurance. It also creates the risk of resentment, if some employees receive access to company cars and others don't, especially if the company cars see mixed business and personal use. Car allowances are only an option when employees already have their own cars. Reliability varies from one worker to another based on vehicle age and condition, and differences in fuel efficiency mean that some employees profit or lose money from the same standard car allowance that represents a break-even deal for others.

According to the Internal Revenue Service, workers who receive company cars may be allowed to deduct the cost of maintenance and operation, including fuel. This only applies to vehicle use that is for business purposes, and in cases where the employer reports the value of the company car on your W-2 form as part of your taxable income. Car allowances also get special tax consideration, and they are deductible from your taxable income if your employer reports them as accountable, taxable income. Employers are responsible for informing employees who receive car allowances of how they were reported, so the employees can file their tax returns properly.