The use of a company vehicle is a valuable tax free fringe benefit for owners and employees of small businesses. This benefit results in tax deductions for the employer. In addition, tax breaks are available for the owners and employees using the cars. (And of course, they get the non-tax benefits of driving the cars!) Even better, recent tax law changes and IRS rules make company car tax benefits more valuable than before.
Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You are expecting to drive the car 8,500 miles a year for business. In addition, you plan to use the car for about 7,000 miles of personal driving. This includes commuting, running errands and weekend trips with your family. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new luxury $50,000 sedan.
Your cost for personal use of the vehicle will be equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car!
Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset. This means that the car is subject to depreciation deduction restrictions from purchasing the automobile. Out-of-pocket expenses related to the car are deductible, including the portion that relates to your personal use. These expenses include insurance, gas, oil and maintenance.
If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense. Exception to this rule would be if the business is subject to business-interest limitation under the tax code.
In contrast, if you bought the auto yourself, you wouldn’t be able to itemize any deductions. Your outlays for driving the vehicle for business purposes would not include reimbursement. Under the Tax Cuts and Jobs Act, employee business expenses are non-deductible from 2018 to 2025 due to the suspension of itemizing miscellaneous deductions. Plus, if you are financing the car yourself, the interest payments would be non-deductible.
And finally, the purchase of the car by your corporation will have no effect on your credit rating.
Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Tracking and valuation for personal use will always be necessary under the fringe benefit tax rules and treated as income. This article only explains the basics.
Purchasing a company car does involve necessary valuation and paperwork, and can be somewhat tedious. However, providing a company car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost. Best of all, a company car can generate some great small business tax deductions. Our accounting firm can help you stay in compliance with the rules and explain more about this prized perk.