I'm confused about car allowance

[NewMexico]

Client gets $500 month car allowance. This is reported as regular wages on w-2. She does not have to submit mileage logs to company. A state auditor says that she is only entitled to deduct business mileage that is above the car allowance income? (Only entitled to mileage above and beyond what the $500 was intended to cover)

I thought since it was reported as income, she could deduct all of her mileage against it?

What's the correct answer ?

If the state is right, what's the theory ?

[Bill Tubbs]

both right...

When the car allowance is not a tax-free benefit (i.e. added to the W-2), client can deduct all mileage as unreimbursed employee expense.

Auditor is correct if the car allowance is not added to the W-2 (which would be an accountable plan -- but this is not the case in this instance).

Bill