A company car can provide your small business with reliable transportation to get to appointments or job sites while also providing terrific tax benefits to your business.
As with any major purchase, though, there can be major drawbacks if done incorrectly or at the wrong time. If you’re thinking of buying a company car, here are some important considerations.
Do You Need a Business Vehicle?
The first question you need to ask yourself is whether you need a business vehicle. If you regularly use a personal car for business, then you may want to consider a business car or truck. If, however, you don’t use your vehicle much for business purposes you may be better off waiting. (You should still be able to get tax write offs for valid business use of your personal vehicle.)
Tips for Buying a Company Car
If you decide you need a company vehicle, you’ll next want to evaluate whether the cost of the car is worth it to your business, and whether your business can afford it.
Take all potential operating expenses into account: the cost of the vehicle, the monthly payment for financing or leasing, repairs, fuel and commercial auto insurance. If you’re considering getting the vehicle wrapped for advertising purposes, include that cost as well.
Be especially cautious if your business has frequent cash flow fluctuations. You don’t want to fall behind on payments and hurt your personal credit or business credit.
If you’re still leaning toward buying a company car, your next decision is whether to buy or lease.
Leasing a business vehicle can be great for cash flow and is often especially appealing to business owners who want a newer vehicle every few years.
With leasing there are two main types. A closed-end lease usually means lower payments and shorter terms. At the end of the lease, you may buy the vehicle or turn it in. With an open-end lease, you’ll likely own the vehicle at the end, though the cost you have to pay may depend in part on the residual value you negotiate with the lease company.
If you decide to buy, you’ll either buy a used or new vehicle. If you don’t want to pay cash, you’ll have to secure financing through a lender offering business vehicle financing.
Both leasing and buying may offer a low down payment and tax advantages.
Tax Benefits Of Buying A Company Car
There can be substantial tax benefits to a company car, but understanding and following them can be complicated at times. The IRS is known to scrutinize these types of expenses and you must keep good records. If you don’t and you are audited, you may own taxes and penalties. Be careful here!
Note: The following discussion is for educational purposes only. Always consult with a tax professional about your individual situation..
IRS Publication 463 details tax deductions expenses associated with a vehicle used for business. Here is an overview of the top considerations:
There are two main methods used to deduct car expenses:
- Standard mileage rate (58.5 cents per mile in 2022) or
- Actual car expenses.
If you want to use the standard mileage rate for a car you own you must choose to use it in the first year the car is used for your business. After that, you may choose either method, though you can’t mix and match during the same year.
If you choose the standard mileage rate for a car you lease, you must use it for the entire lease period. In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls.
There are times you can’t use the standard mileage rate method, including if you claim a Section 179 deduction (more in a moment) or if you own and use five or more vehicles at the same time.
If you decide to use the actual expense method, those expenses may include depreciation, gas, insurance, licenses, lease payments, registration fees, repairs, oil, garage rent, tires, tolls, and parking fees. Again, you must keep proper records of these expenses.
Note that if you use your car for both business and personal uses, you must divide your expenses between business and personal use— and keep good records substantiating that use.
Entrepreneurs who are both the owner of, and an employee in, their business may have the choice of either using your vehicle as an employee and getting reimbursed by the business for expenses, or as the owner.
If you are self-employed and use your car in your business:
- You can deduct the portion of the interest expense that represents your business use of the car. Employees can’t deduct interest on a business vehicle.
- You can deduct the business part of state and local personal property taxes on motor vehicles on Schedule C (Form 1040), or Schedule F (Form 1040).
Depreciation and Section 179
Depreciation of the cost of the vehicle may be another tax benefit. You usually can’t deduct the cost of the car (plus sales tax and improvements) because it’s considered a capital expense. However, you may benefit from the Section 179 deduction. special depreciation allowance, and depreciation deductions. By using depreciation, you can recover the cost over more than 1 year by deducting part of it each year. If you choose this method other restrictions come into play, so make sure you understand the rules.
If your company car qualifies for the 179 deduction, you can recover all or part of the cost of a car, up to a limit, by deducting it in the year you place the property in service. This can be a very valuable deduction. However, you must use it more than 50% for business to claim a section 179 deduction. For 2021 the limit for a heavy SUV and certain other vehicles was $26,200.
Not all vehicles qualify. Notably it does not include a vehicle used directly in the business of transporting persons or property for pay or hire. It also does not include trucks or vans that aren’t likely to be used for personal use more than minimally. (For example, a truck that’s been modified for delivery and doesn’t offer seating for anyone other than the driver.)
If you don’t choose the Section 179 deduction you may still be able to claim a depreciation deduction over a longer period of time (subject to limits). Again, the rules can be complicated so either review IRS publication 463 or talk with your tax professional.
A few more tax tips for business vehicles:
- Putting display advertisements for your business on your car (for example, wrapping your car) does not turn a personal use of a vehicle into business use.
- Commuting is generally not a normal business expense though there are some specific exceptions.
- You can’t deduct fines for traffic violations, unfortunately.
- Travel away from home overnight usually falls under travel expenses, not transportation expenses.
Pros of a Company Car
As mentioned, the tax breaks associated with a company-owned car can be significant, if you qualify. A company car may also be used as a perk for employees.
If the car is involved in an accident and you have adequate commercial auto insurance, there should be no repercussions to your personal car insurance.
Cons of a Company Car
As with buying a new car for personal use, the up-front cost and monthly payments associated with a company car requires a financial commitment.
Paying for repairs and general upkeep of the vehicle, even with tax benefits, can have an immediate impact on your business.
The liability on a company car goes up as more and more employees use it, meaning the insurance expenses for your business could be significant. Your personal insurance may not be impacted in case of an accident, but the legal stress for the company is enough to make it a headache nonetheless.
So, if you’re considering purchasing a company car, be sure to give it significant thought and run the numbers on your business. Some areas of your business may need your attention before such a purchase is possible or wise. Best case scenario, a company car can provide great incentive for your employees and improve efficiency within your organization.
Why Buying a Company Car Could Help Your Business Credit
If you decide to purchase or lease a vehicle for business use, you’ll want to explore financing options.
Small business owners may be able to get a car loan or lease in the business name, allowing you to further separate your business and personal finances. Your business may need good business credit scores to qualify for financing in the company name.
If you do get this type of financing and pay on time, it should provide a good reference on your business credit reports, which in turn can help you qualify for other small business loans. Most business vehicle loans and leases are reported to the SBFE, and may be reported to other business credit agencies.