What You Need To Know About Car Allowances

I was hosting a webinar recently, and one of our attendees asked: “Do you have any advice on car allowances from the individual/company audit?” Here’s our response:When it comes to car allowances, usually what typically happens when there’s a company that you work for, If you use your car for work purposes instead of the business supplying a car, or you use your own car, the business then pays an allowance to you to reimburse for any costs for using your car. That reimbursement is usually included as taxable income, and you then claim the deduction on your car so it offsets each other. So if you use all your allowance for your car expenses there should be no tax payable.

Now, if you own your own business, typically speaking, we would first of all go a step backward and ensure that any cars that you buy is bought in the business in the first place, so that you don’t have to pay the allowance. Essentially you use the car for business purposes – let’s say 80% business purposes, and then 20% private use. We then take up that private use as a contribution that you make to the business essentially to recoup that. So it’s the other way around – you’re reimbursing the cost of the 20% to the business for using that car. You don’t necessarily need to take an allowance out for that unless you own that separately.

If you are using your personal car in the business, you can pay yourself an allowance. I would then pay the exact amount to the amount of expenses that you’ve used for the business. So you want to do a summary of what your expenses are, reimburse that from the business, that you essentially the deduction is in the business, not you personally.

That’s generally how it works but, again, the level up before of having the car in the business has other benefits as well. One of the big ones is depreciation – owning the car in the business means that you can claim the depreciation upfront.

Learn the 12 things you can do to legally reduce your business tax bill in 2021- FREE on my e-learning page at https://learning.benwalker.com/courses/TaxPlanning2021

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