Final answer:
A car allowance is considered reasonable by the IRS and CRA if it aligns with the actual costs or adheres to the standard mileage rates for business-related vehicle expenses. The allowance becomes taxable if it exceeds the defined standards.
Step-by-step explanation:
The reasonableness of a car allowance as defined by the Revenue Services such as the IRS (Internal Revenue Service in the United States) and CRA (Canada Revenue Agency in Canada) is based on whether the allowance covers expenses that are business-related and does not exceed the amount considered necessary for these purposes. For the allowance to be deemed reasonable, it must be calculated based on actual costs incurred, or it must align with standard mileage rates provided by the IRS or CRA, depending on the country. Employers provide a car allowance to compensate employees for the business use of their personal vehicle, and the defined rates help to ensure that the allowance covers typical expenses like fuel, maintenance, insurance, and depreciation.
In the United States, the IRS sets a standard mileage rate that taxpayers can use to calculate their vehicle expenses for business purposes. This mileage rate takes into account all the costs associated with operating a vehicle. If the car allowance provided is greater than the standard mileage rate, the excess amount could be considered taxable income. The CRA, on the other hand, allows for a tax-free car allowance as long as the allowances are within the limits they consider reasonable, which is typically based on a per-kilometer rate for business travel.