DriveCalc

Car Allowance vs Mileage Reimbursement

The tax treatment is the whole game: allowances are wages, accountable-plan mileage is tax-free. Find your break-even miles and see which offer actually pays more.

The two offers

Your situation

$3,948
Mileage reimbursement wins — per year, after tax
break-even at 9,360 business miles/yr — you drive 15,000
$6,552
allowance, after tax
$10,500
mileage, tax-free
$0.44
allowance works out to /mi
Allowance (net)$6,552/yr
Mileage (tax-free)$10,500/yr
See the math

Flat allowance is taxable wages: net = $/mo × 12 × (1 − tax rate) = $700 × 12 × 0.78 = $6,552. Accountable-plan mileage is tax-free: 15,000 mi × $0.70 = $10,500. Break-even: net allowance ÷ rate = 9,360 miles/yr. Above that, per-mile pays more; below it, take the flat money. Hybrid FAVR plans land in between — model them as a lower rate plus a smaller allowance.

Frequently asked questions

Is a car allowance or mileage reimbursement better?

It depends on your business miles. Allowances are taxable wages while accountable-plan mileage is tax-free, so high-mileage drivers usually come out ahead per-mile and low-mileage drivers ahead on a flat allowance. The break-even is net allowance ÷ mileage rate — for $700/mo at a 22% rate versus $0.70/mile, about 9,400 business miles a year.

Why is my car allowance taxed?

A flat allowance with no mileage substantiation is non-accountable, so the IRS treats it as wages subject to income and payroll taxes. Reimbursements under an accountable plan (documented business miles at or below the IRS standard rate) are excluded from income.

What is a FAVR plan?

Fixed and Variable Rate: a hybrid that pays a fixed monthly amount for ownership costs plus a per-mile rate for running costs, tax-free when IRS requirements are met. Model it here as a smaller allowance plus a lower mileage rate.

Educational tool, not tax advice — rates and rules change; confirm current IRS figures and your plan's terms.