What Is a Cash Allowance?
In financial accounting, a cash allowance refers to an expense that is repaid immediately in cash, instead of being reimbursed at a later date. Employers will typically give employees cash allowances to cover incidentals and the costs of work-related expenses, such as meals, lodging, dry cleaning, and office supplies.
Cash allowances can also refer to an up-front incentive that a car dealership uses to sell cars. Alternatively, it may refer to a nominal amount of money paid by parents to their children for completing various household chores or tasks.
- A cash allowance grants permission to use funds for business-related purposes rather than reimbursing accrued expenses at a later date.
- Petty cash and per diems are common examples of cash allowances used by businesses.
- Setting a cash allowance depends on assignment time, location, or the per diem federal rate.
- Typically, cash allowances are considered taxable income to the employee, like wages and salaries.
- A cash allowance may also refer to an incentive used by car dealerships as a promotional consideration or money paid by parents to their children for completing various household chores or tasks.
Understanding Cash Allowances
A common example of a cash allowance is the use of a petty cash account. This fund is a small amount of cash on hand used for paying expenses 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.
Another common cash allowance is a per diem expense. Companies that provide a daily cash allowance may refer to it 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.
Typically, cash allowances are considered taxable income to the employee, like wages and salaries. The employee 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.
Setting a Cash Allowance
Setting a cash allowance depends 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.
New Car Cash Allowances
Car dealers offer cash allowances to increase turnover and meet sales quotas. A cash allowance 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.
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.
Often, buyers use a cash allowance to add additional features, such as tinted windows or an upgrade to leather seats. Before agreeing to a cash allowance deal, it is prudent to research the dealership to ensure there are no links to fraudulent activity.