Do you have to pay tax on car allowance?

if it is strictly considered a reimbursement for using your vehicle for business use then you will not be responsible to pay taxes or even report this as income. If however, it exceeds the cost of using your vehicle for business then you will have to report this as income. For this reason you need to keep a log just like you would for deducting unreimbursed business expenses. This would be necessary in case your return was ever examined by the IRS so that you could show that through mileage or actual expenses you were reimbursed less than you would have been able to deduct if you itemized expenses. Do not take a deduction on form 2106 and receive an allowance.