Car Allowance vs Company Cars - Which Is Better For Your Business?

When it comes to covering your employees' required travel expenses, there are two options you can choose from. The first option is to provide a company car that you own, and employees can use it at your discretion. The second option is to provide a car allowance. A car allowance reimburses your employees for the cost of using their own vehicles for business-related expenses.

When it comes to a car allowance vs a company car, the choice of what is best for your business may not be easy. So, let's take a closer look at both of these options and how they measure up.

How company cars work

A company car program means that the employer purchases and maintains vehicles to which it provides employees access. These cars allow employees to perform travel at the employer's cost while eliminating the need for employees to use their own vehicles for business-related travel. You may even choose to allow an employee to use these vehicles for personal use as well.

You are likely wondering how company car tax works, and this can be one of its significant benefits. The cost of company cars can be depreciated and deducted, as can the costs of purchasing, maintaining, and operating these vehicles. However, it remains crucial to record all business-related use of these vehicles in order to claim any tax deductions.

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How car allowances work

A car allowance is money that an employer pays employees to cover the cost of using their personal vehicle for business-related travel. This 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 rate of pay. The employee can choose how to spend the allowance, and it will generally be taxed at their regular rate.

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 do have their cons, starting with their cost. A vehicle fleet is costly to insure and maintain, particularly if they are not being used regularly. There is a lot of administrative work involved in managing a vehicle fleet and ensuring that they are being properly maintained.

Pros and cons of paying out car allowances

A car allowance is typically simple to manage. You will not have to deal with administrative hassles such as maintaining, repairing, or insuring a vehicle. In addition, employees are able to choose their vehicle as well as whether they would prefer to lease it or purchase it outright. In this way, it offers a considerable degree of flexibility for both you and your employees.

Unfortunately, standard car allowances are taxable, which can reduce your employees take home amount significantly. However, this can be mitigated by tracking your employees' business-related mileage and showing that the car allowance does not exceed the amount allowed by the IRS business mileage rate.

What you should choose - car allowances or company cars

When it comes to car allowance vs company car programs, both can offer you significant advantages. A company car can serve as an incentive for high-ranking employees or as a recruitment tool. In addition, it can allow you to control the image that your employees project as they travel. However, with a car allowance, your administrative costs are reduced as there is no need to deal with purchasing, insuring, or maintaining vehicles. 

The choice between these two programs may depend on a company's situation. In cases where employees do not work at a centralized location or do not travel frequently, a car allowance may be appropriate. In cases where employees frequently travel from a centralized location and can pick up and drop off company vehicles as needed, this can be an efficient option. 

As for the car allowance vs company car tax implications, 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 any reimbursements as a business expense.

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