When it comes to getting a vehicle for business, owners often face a dilemma: should they buy the car under the business name or as a personal vehicle? This decision can have significant financial implications and needs careful evaluation. The vehicle’s ownership type and business use can have significant effect on the business deductibility of the cost of owning and operating a vehicle.
What is Business Use of Vehicles?
Per Internal Revenue Service (IRS), the vehicle must be used for business purposes to claim its relative costs as deductible. This includes the ordinary and necessary costs of the following:
- Visiting clients, consultants, or banks.
- Going from one workplace to another.
- Attending business meetings or conferences.
- Going to stores or suppliers for materials.
- Delivering products to customers.
Your daily drive from home to the office and back, regardless of the distance, is a personal commuting activity and shall be excluded from your business deduction. However, this changes when your place of residence is also a home office, in which case the mileage driven from your home to any point of business destination within your tax home can be considered a business activity.
There are two main methods in calculating the business use of vehicles, the standard mileage rate method and actual expense method. We have a dedicated blog for this topic which was published last June 15, 2023 (Calculating Business Use of Vehicles: Understanding Standard Rate and Actual Expense Method – Accountant (1099accountant.com)).
Self-Employed or Sole Proprietor as the Vehicle Owner
If you are self-employed or a small business owner who uses your personal vehicle for your trade or profession, you can deduct the business portion of your vehicle expense using either the standard rate method or the actual expense method.
However, the actual cost of owning the personal vehicle cannot be reported as a business asset and therefore will not be subject to depreciation. The depreciated cost of the vehicle could have been a significant business deduction that could lower your taxable income if the company owned the vehicle.
Company-Owned Vehicle
The entire costs of owning and operating a company-owned vehicle can be deductible, irrespective of its business use, provided the personal use of the vehicle will be treated as employee income.
If a company provides its employee a vehicle solely for business use, it will not become part of the employee’s taxable income. However, if there are miles driven for personal use (such as commuting from home to office), it can be treated as additional wages to the employee and must be reported on their W2.
The actual cost of the company-owned vehicle is also a capitalizable business asset that can be depreciated over time. This can help you lower your business tax obligations during the filing season.
Note that for this type of vehicle ownership, the related expenses can only be accounted using the actual expense method.
Vehicle Ownership Summary
When it comes to weighing your options between having a personal car or a company vehicle, it is crucial to consider the allowable business deductions. To make an informed decision, it is advisable to consult with a tax professional who can evaluate your specific situation and guide you toward maximizing tax benefits while ensuring compliance with the IRS.
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