Whether the owner is the business or an employee, an automobile purchased for business usage offers specific tax advantages for the owner. But, before you buy that car, think about the benefits and drawbacks of having the company or an employee own it. This option has tax ramifications as well as other issues to consider. In this case, we’ll compare corporate versus employee ownership.
Allowable Business Expenses for Car/Truck Use
To begin, keep in mind that only real business usage of the car is deducted as a business expense, regardless of whether the firm or the individual owns the car. Personal travel is not deductible, and neither are commuting expenses between home and work.
To have those miles permitted as a deduction, whoever drives the car must keep appropriate records on business travel expenses. You might want to use a business driving app to keep track of your miles.
Taxes and Commercial Vehicles
The cost savings through tax deductions are perhaps the most significant benefit of owning a business car for either the firm or the individual. This conclusion is divided into two parts:
1. Amount deducted for owning a car
2. Deductions for business-related travel expenses
The purchase of the automobile as a company asset and the costs of using the car is both entirely deductible from business taxes for the owner.
The cost of the car as an asset is not deductible for the employee, nor are the interest expenses on the car loan. Unreimbursed business expenses are no longer deductible by employees.
Benefits of Vehicle Ownership as a Business
Depreciation expenses can be deducted at the rate in force when the asset is put into operation (begins to be used). For business usage of the vehicle, the corporation can additionally deduct regular auto expenses such as maintenance, gasoline, and tires. In addition, interest on a car loan is deductible as an ordinary and necessary business expense (for the percentage of business use only).
If the company owns the car, personal use must be documented. Personal usage by an employee—for example, driving the car to and from work—must be reported as taxable compensation on the employee’s W-2.
Because businesses can get leased-car and multiple-car rates and other reductions, insurance for a company-owned automobile may be less expensive than insurance for an employee-owned car. If a company-owned vehicle is involved in an accident, the driver’s personal insurance premiums and liability are reduced, especially if the employee has additional auto insurance.
Vehicle Ownership by Employees
The 2017 Tax Cuts and Jobs Act (TCJA) abolished the principal benefit of employee ownership of a vehicle for business transportation, commencing in 2018 and lasting until 2025. As previously stated, employees can no longer deduct unreimbursed business costs, such as business driving expenses, on Schedule A.
In addition, the employee may need to purchase a separate auto insurance coverage to cover the vehicle’s commercial use. While the employee’s personal insurance may cover some damage, it is unlikely to cover the car if it is used primarily for work purposes. Consider a plumbing company with a business truck that is utilized to make calls. If the owner drives the truck to the store and has an accident, the damage may not be covered because the truck was not being used for commercial purposes at the time.
Buying a Car vs. Leasing a Car for Business
If a company decides to lease a car for employee business usage, the same considerations may apply. You don’t influence how many miles an employee puts on a car if you lease it to them. Mileage restrictions are common in car lease agreements.
You may be able to manage personal use and keep costs down if you (as the owner) use a leased car. Every scenario is different, but leased cars should be considered rewards for owners and executives, and cars should be purchased if they will be driven by staff.
If you are interested in a more informative article, check out this article about how to keep track of your business finances.