DEFINITION of Cash Allowance
A Cash Allowance refers to an allowance that is paid out in cash, instead of being reimbursed at a later date. Employers usually give employees cash allowances to cover the costs of work-related expenses, such as meals, lodging, dry cleaning and Wi-Fi charges. Companies that provide a daily cash allowance may refer to it as a per diem. Per diem translates to “per day” in Latin. For example, a company may pay a marketing executive a per diem each time they travel to a regional office to train a new staff member. Cash allowance can also refer to an incentive a car dealership uses to sell cars.
BREAKING DOWN Cash Allowance
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, his or her 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. For example, 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. (daily cash allowance $100 x five days = $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. (For more, see: Finding Per Diem Rates?)
New Car Cash Allowance
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, however, 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.