Ask The Expert (October 2009) - Car Allowances
Trey Bayne, CPA Partner In-Charge Tax Services
A s the economy contracts and government debt continues to expand, we expect the IRS to become more aggressive in seeking out taxpayers who are not fully complying with the Internal Revenue Code. An area that is frequently overlooked and misunderstood by business owners is the realm of car allowances.
- Generally, car allowances are paid in three forms:
- A monthly lump sum payment to be used for gas, repairs/maintenance and car payment.
- Payment of an employee's car loan by the company
If you are providing car allowances that require the employee to substantiate the business usage of the vehicle through mileage reports, receipts and other documentation, then those allowances are generally considered expense reimbursements, which are a deduction to the employer and not taxable to the employee.
In most cases, business owners are paying car allowances and do not require any type of accountability or business usage substantiation. These “nonaccountable plan” allowances, whether car payments, lump sums or trip fees, would be considered by the IRS to be wages for which the company is liable for its half of payroll taxes (Social Security and Medicare) and should be reporting the wages on the employees' W-2.
If you are audited and the IRS finds that you have been paying allowances which should have been subject to payroll taxes, then your business will likely be responsible for BOTH the employee and employer portion of Social Security and Medicare payroll taxes plus penalties and interest.
Our clients rely upon us to provide solutions to critical tax issues and our philosophy is that effective tax management is more than an annual conversation. As your tax advisor, we establish a system for active communication so we stay informed about your financial condition and changes which may affect your tax situation.
We want to make sure you understand and appropriately plan for the tax consequences resulting from financial decisions and that we actively discuss effects on the current year and future years. Our team of experienced professionals will develop with you a tax strategy that is as unique as your business and work to ensure your plan is always focused on maximizing wealth and protecting and accumulating assets.
The MB Group, LLC is a certified public accounting firm providing a comprehensive range of professional and consulting services, including assurance, tax, compliance, accounting, business consulting and financial services.