Cash Allowance

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.

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:

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.