The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. A company car tax writeoff results in deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the non-tax benefit of getting a company car.) Plus, current tax law and IRS rules make the benefit even better than it was in the past.
Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car.
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 $55,000 luxury sedan.
Your cost for personal use of the vehicle is equal to the tax you pay on the fringe benefit value of your 45% personal mileage. (See the updated 2022 mileage rate). By contrast, if you are purchasing 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.
You will treat your personal use as fringe benefit income. Company car tax benefits are much the same way it would any other business asset. Upon purchase of the auto, the asset will be subject to depreciation deduction restrictions. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).
In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses. Additionally, they will be nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.
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. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.
Despite the necessary valuation and paperwork, a company car tax writeoff is still a valuable fringe benefit. This benefit applies for both business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.