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This report includes a summary of key changes, including the salary level test and salary basis test.

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August 18, 2010
Setting Up an Employee Auto Allowance

In a BLR webinar entitled "Mileage/Commuting Expenses: How to Avoid Big Mistakes With These Employee Expenses," Mark E. Tabakman, Esq., partner in the nationwide law firm Fox Rothschild, LLP and Stacy Wade, Ph.D., CPA, assistant professor of accounting at Western Kentucky University, described ways in which companies provide employees an auto allowance -- a fixed monthly payment to obtain and operate their own vehicles.

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This policy reduces your liability, because you'll be held liable for only the business use of employees' personal cars. However, you must set policies for the use of these allowances, so that employees don't simply take the cash, buy or lease an older used car, and pocket the difference!

You may set up auto allowances in two ways:

  • Accountable plans: Employees track their personal use of the car versus their business use, and they return to you the portion of the allowance spent on personal use. (The remainder is not considered wages, and therefore it's not subject to income tax.)
  • Nonaccountable plans: Employees do not track their exact use of the cars, and the allowances are considered wages subject to income tax. (Employees can then itemize the business-use portion of their allowances from their personal income tax.)

Mark E. Tabakman, Esq., is a partner in the nationwide law firm Fox Rothschild, LLP ( He advises clients throughout the country on all aspects of labor relations and employment law, as well as the development of corporate employment policies. Stacy Wade, Ph.D., CPA, is assistant professor of accounting at Western Kentucky University ( She teaches undergraduate and graduate courses in financial accounting and taxation.

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