Cash Allowance Definition

What Is a Cash Allowance?

The term cash allowance refers to an amount of money paid to someone on a regular basis. Cash allowances are normally used to cover certain expenses. Employers typically provide employees with cash allowances to cover incidentals and the costs of work-related expenses, such as meals and lodging. Cash allowances may be paid by parents to their children to cover weekly or monthly expenses or for completing various household chores. The money is paid upfront rather than being expensed and reimbursed.

How Cash Allowances Work

As noted above, a cash allowance refers to a sum of money that is paid to someone on a regular basis. The allowance is normally paid on a weekly or monthly basis in order to cover expenses. In most cases, cash is provided on the same day each week or month, such as every Friday or on the first of the month.

The most common cash allowances are paid by parents, car dealerships, and employers. For instance:

• Parents can give their children a weekly or monthly cash allowance to provide them with spending money or in exchange for chores done around the house.
  
• Auto dealerships offer what they call cash allowances or incentives in order to entice new buyers to purchase their vehicles. These allowances are put toward the purchase price of the vehicle.
• Employers commonly pay their employees cash allowances to cover common expenses, such as meals, lodging, dry cleaning, and office supplies. Paying an allowance eliminates paperwork, where employees have to file expense reports, provide receipts, and wait for reimbursements.

Cash allowances are typically considered taxable income when they are paid from employer to employee. As such, they are taxed just like wages and salaries. Employees can then claim employment-related expenses against the increase in income.

For example, if an employee receives an annual cash allowance of $10,000 for work-related expenses in addition to an annual salary of $75,000, their taxable income would be $85,000 ($75,000 + $10,000). The employee can then claim work-related expenses against their income of $85,000 at tax time.

Factors that Affect the Amount

Employers usually set aside money in a special account to cover their employees' cash allowances. This is referred to as a petty cash account. This small amount of cash is kept on hand to pay for expenses that are too small to merit writing a check. A petty cash fund provides convenience for small transactions such as meals, office supplies, postage, etc. There might be a petty cash drawer or box in each department for larger corporations.

Employers who set aside a cash allowance often do so based on the following factors:

• Assignment Time: Companies often determine an appropriate cash allowance based on how long the employee is on assignment. If a staff member is working in an interstate office for one week, their allowance might be based on the average daily cost of taxis, meals, and lodging multiplied by five days. For example, a daily expense of $100 x five days = a $500 cash allowance.
• Location: The city, state, or country where the employee is working might determine the cash allowance they receive. For example, a company would typically provide a higher cash allowance for staff working in New York than employees working in Kansas City due to the higher cost of living in New York.
• Per Diem Federal Rate: Companies may use the federal per diem rate as a reference to set a cash allowance. If companies set an allowance at or below the federal per diem rate and the employee completes an expense report, the Internal Revenue Service (IRS) does not consider it part of the employee’s wages.

Types of Cash Allowances

The following are some of the most common types of cash allowances.

Dealer Cash Incentives

A cash allowance offered by a dealership is typically available for cars that the dealer thinks may not sell for six months or more. From the buyer’s perspective, the cash allowance is deducted from the car’s suggested retail price. Dealers normally offer incentives to increase turnover and meet sales quotas. 

Most cash allowances have an expiry date between one and two months, although the incentive may be extended if the car dealership needs more room for newer models. Buyers use these allowances to add additional features, such as tinted windows or an upgrade to leather seats. Buyers should do their research to make sure they're getting the best deal possible.

Per Diem Expenses

Companies may even provide their employees with a daily cash allowance. This is often referred to as a per diem, which translates to per day in Latin. For example, a company might pay a marketing executive a per diem each time they travel to a regional office to train a new staff member.

If you travel for business or have employees who travel, it is important to understand per diems, which offer an alternative to reimbursement based on detailed expense records and require less elaborate bookkeeping.