What is a Cash Allowance?
Employees of companies are entitled to certain allowances to cater for expenses such as travel expenses, accommodation, wardrobe, medical expenses, and others. When a company pays out such allowance in cash rather than reimburse them at a later date, it is an instance of the cash allowance. A cash allowance is paid out on cash instead of being reimbursed at a specific time. Sometimes, employers pay such allowances on a daily basis through a ‘per diem’ scheme. Hence, rather than reimburse an allowance at a later date, companies can pay the allowances in cash each time an employee embarks on official duty.
Example of a Cash Allowance
Oftentimes, employees claim cash allowances as work-related purposes. The Internal Revenue Service considers such allowances received in cash is taxable income, the same manner salaries and wages are treated. For instance, if an employee receives a lodging and feeding allowance of $35,000 in addition to his salary of $150,000, the IRS expects the employee to pay a tax on the total amount of $185,000. Such an employee can, however, claim work-related expenses against the total income.
Setting a Cash Allowance
There are specific procedures that are followed when setting cash allowance, companies also consider certain factors, they are the following.
- The location where an employee is working. The distance of the city, region or country determines how much an employee will be paid as a cash allowance.
- The nature of the assignment is another factor employers consider when setting the cash allowance.
- The rate set by the Federal or state government as per diem is another factor that companies consider.
New Car Cash Allowance
In a car dealership, many car dealers offer cash allowance to quicken the sale of a new car that might likely not be sold for a period of time. This cash allowance is used by car dealers to attract clients and aid the quick purchase of the car. This allowance entails a reduction in the price of the car at the time of purchase. Car dealers set a time frame for cash allowances, it can be one or two months, after which the offer is no longer obtainable. Depending on the dealer, cash allowances also come with additional benefits.