Company Car vs. Car Allowance: Which is Better for Your Business?

Wondering what's the best way to cover employees' travel expenses - providing company cars or paying out car allowances? Let's take a closer look at the pros and cons of each option, how they’re taxed, and how they can contribute to your business.

Providing company cars

A company car is owned and maintained by the company, while the employee simply has the right to use it—typically for business travel and, if allowed, for personal trips as well. 

This can be an attractive benefit for employees, as they can access a car without the costs or hassles of ownership and operational expenses. However, they also don’t have the freedom to choose the vehicle.

Taxation of company cars can be a pro for the business

From a business perspective, company cars offer tax advantages. The costs of purchasing, maintaining, and operating these vehicles can be depreciated and deducted. However, to claim these deductions, it is essential to document all business-related uses accurately.

Mileage tracking made easy

Trusted by millions of drivers

Automate your logbook Automate your logbook

Claim your deductions

Reclaim your time

Automatic mileage tracking and IRS-compliant reporting.

Get started for free Get started for free

Providing car allowances

A car allowance is money that an employer pays employees to cover the cost of using their personal vehicle for business-related travel. The allowance may cover the purchase price of a vehicle, but in most cases, it will simply cover the costs of fueling, maintaining, and caring for a car.

A car allowance is typically a flat rate paid to employees in addition to their regular pay rate. The employee can choose how to spend the allowance, which will generally be taxed at their regular rate.

Company Car vs. Car Allowance: Key Differences

If you choose to go with a company car program, be aware of the following details: 

If deciding on a car allowance plan is a better option for your business, notice how it affects ownership, etc.: 

Pros and cons of providing company cars

A company car program has several benefits, including eliminating the need for employees to purchase or maintain a vehicle that will be used for business travel. This simplifies accounting for employee expenses. It can also provide you with control over the appearance of vehicles that will be used. In addition, employees generally see company cars as a benefit that can attract new talent and raise employee morale.

However, company car programs have cons, starting with cost. A vehicle fleet is costly to insure and maintain, particularly if it is not being used regularly. A lot of administrative work is involved in managing a vehicle fleet and ensuring it is properly maintained.

Pros & cons: 

• Pro: No cost is imposed on the employee 
• Pro: Simplified accounting expenses for employees
• Pro: It is generally seen as a benefit and can attract talent 
• Con: The cost to maintain and insure a fleet can be high

Pros and cons of paying out car allowances

A car allowance is typically simple to manage. The company does not need to deal with administrative hassles such as maintaining, repairing, or insuring a vehicle. In addition, employees can decide which car they’d like and whether it should be bought or leased. This offers a considerable degree of flexibility for both the company and its employees.

Unfortunately, standard car allowances are taxable, which can significantly reduce your employees' take-home pay. You can turn taxable income into non-taxable income. It will require that employees track their business-related mileage and document that the car allowance does not exceed the amount allowed by the IRS business mileage rate. Learn more about the IRS’ Accountable Plan. 

We recommend automating mileage tracking on a company level with an automatic mileage tracker app for even less administrative burden.

Pros & cons: 

• Pro: Simple to manage and no administrative burden for the company 
• Pro: High flexibility for the employee in terms of ownership and usage 
• Con: Car allowance is considered income and is taxable, which can decrease the value of the allowance 

What you should choose - Company car or car allowance?

When it comes to company car vs. car allowance, both can offer significant advantages. 

A company car can help recruit talent, as many employees consider it a benefit. Additionally, it can allow you to control the image your employees project when on the road. 

Conversely, a car allowance comes with fewer administrative costs as the company doesn't need to purchase, insure, or maintain vehicles. 

As for the tax implications of a car allowance vs. a company car, whether you choose a car allowance or company car, you can claim a tax deduction by tracking your employees' business-related vehicle use, including mileage. 

This is necessary to avoid taxing employees and to allow you to write off reimbursements as business expenses. Learn more in our guide, Mileage Reimbursement Rules for Employers. 
 

FAQ