My husbands boss offered him a $500 vehicle allowance if we used our own truck, paid our own insurance and registration which we did. No they are taking a bunch of deductions off the $500 so we are left with only about $240. Can they do that ?

A set allowance like that is taxable. It will be added to your income on your W-2.

There are two types of ways to do this. One is what they call "accountable." That basically means you're being directly reimbursed for your expenses, either by tracking them, or just a set mileage rate, which can be as high as the federal rate without being taxed.

The other way is what you're describing here - just a set allowance amount that you may or may not spend. That's taxable.

Now, along with being taxable, you can also deduct the expenses. Some expenses, like depreciation or insurance, would be pro-rated by usage. Those kind can also be done using the federal mileage rate. Others, like parking, are the full expense if that was work-only. I can't recall if you have to itemize to deduct this, but my suspicions are yes.

So you want to look at the big picture. You have to take into consideration that you might be taxed on that $500, but you'll also save some of the tax if you can deduct expenses. (That is, it'll come back off the $500.) And then you also want to look at the fact that if you don't spend it all, you have more income. But this can get complicated. And you have to remember the less obvious and non-cash type things. (Like depreciation.)

One simple thing to do is have him ask if he can just get a mileage reimbursement.

Here's the IRS pub on business use of your car:
Tax Topics - Topic 510 Business Use of Car (http://www.irs.gov/taxtopics/tc510.html)