What is a cash allowance?
In financial accounting, a cash provision refers to an expense that is immediately reimbursed in cash, rather than reimbursed at a later date. Employers generally give employees cash allowances to cover contingencies and the costs of work-related expenses such as meals, lodging, dry cleaning, and office supplies.
Cash allowances can also refer to an initial incentive that a car dealer uses to sell cars. Alternatively, it may refer to a nominal amount of money paid by parents to their children for completing various chores or household chores.
- A cash award grants permission to use the funds for business purposes rather than reimburse accrued expenses at a later date.
- Petty cash and allowances are common examples of cash allowances used by businesses.
- Establishing a cash allowance depends on the assignment time, location, or federal per diem rate.
- Generally, cash allowances are considered taxable income for the employee, such as wages and salaries.
- A cash allowance can also refer to an incentive used by car dealers as a promotional consideration or money paid by parents to their children for completing various chores or household chores.
Understanding a cash allocation
A common example of a cash allocation is the use of a petty cash account. This fund is a small amount of available cash that is used to pay for expenses too small to warrant the ability to write a check. A petty cash fund provides convenience for small transactions like meals, office supplies, shipping costs, etc. There may be a petty cash drawer or box in each department for larger corporations.
Another common cash allowance is a daily expense. Businesses that provide a daily cash allowance may refer to it as per diem, which translates to “per day” in Latin. For example, a company might pay a marketing executive a per diem each time he travels to a regional office to train a new staff member.
If you are traveling on business or have employees traveling, it is important to understand per diems, which offer an alternative to reimbursement based on detailed expense records and require less elaborate accounting.
Generally, cash allowances are considered taxable income for the employee, such as wages and salaries. The employee can claim the 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 the work-related expenses against his income of $ 85,000 at tax time.
Establish a cash allowance
Establishing a cash allowance depends on the following factors:
- Assignment time: Companies often determine an appropriate cash allowance based on the time the employee is assigned. If a staff member is working in an interstate office for a week, their allowance could 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 cash allowance of $ 500.
- Location: The city, state or country where the employee works can determine the cash allowance they receive. For example, a company would typically provide a higher cash allowance for staff working in New York than for employees working in Kansas City due to the higher cost of living in New York.
- Federal rate per day: Businesses can use the federal per diem rate as a benchmark for establishing a cash allowance. If companies set an allowance equal to or less than the federal daily rate and the employee completes an expense report, the Internal Revenue Service (IRS) does not consider it part of the employee’s salary.
New car cash allowances
Car dealerships offer cash allowances to increase billing and meet sales quotas. Generally, a cash allowance is available for cars that the dealer believes will not sell for six months or more. From the buyer’s perspective, the cash allowance is deducted from the suggested retail price of the car.
Most cash allocations have an expiration date of between one and two months, although the incentive can be extended if the car dealer needs more space for newer models.
Buyers often use a cash allowance to add extra features, like tinted windows or an upgrade to leather seats. Before accepting a cash assignment agreement, it is wise to research the dealer to ensure there are no links to fraudulent activity.