Should Your Business Purchase a Vehicle?
Does the nature of your business require a lot of driving? If so, you might benefit from purchasing a company vehicle. But should you buy a personal vehicle and write off the business use? Or buy a vehicle in the company’s name and write off 100% of the expenses?
The following article will help with your decision.
Legitimate Business Vehicles
Many companies purchase vehicles primarily for business use. For example, a contractor might purchase a work truck, or a florist may have a delivery van. These vehicles are driven mainly for business, so the business can deduct the entire cost of ownership and operation (subject to limits, which we’ll go into later).
However, some small business owners mistakenly believe that if they own a business, they can buy a vehicle under the business name and “write off” all the expenses, even if they use the vehicle predominantly for personal use.
For example, say you are an interior designer and buy a new car. You use it as your main car for personal driving, but also for business use such as visiting clients, running business errands, and picking up materials and supplies. In that case, you should buy the vehicle personally and track your business versus personal miles.
Buying a company vehicle and using it frequently for personal trips can cause some unintended tax consequences. Whether the vehicle is driven by the owner of the business or an employee, the IRS considers the personal use of a business vehicle to be taxable income, subject to both income and employment taxes.
There are several ways to determine the value of a company-provided vehicle, which are explained in detail in IRS Publication 15-B.
Deducting a Business Vehicle
So, let’s say you need a vehicle just for business, and you have a different vehicle you use for personal use. How much of your business vehicle can you write off? That depends on the type of vehicle you buy.
While you can generally write off 100% of the cost of other business equipment, the IRS limits the amount of depreciation you can claim each year for passenger vehicles (including cars, light SUVs, pickups, and vans).
Currently, those limits are:
- $18,200 for the first year
- $16,400 for the second year
- $9,800 for the third year
- $5,860 for each succeeding year
In other words, if you buy a $30,000 vehicle, you can write off up to $18,200 of the cost in the first year. You can also deduct all the costs of operating the vehicle, such as fuel, repairs and maintenance, insurance, and registration fees.
Heavy SUVs, pickup and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds qualify for normal Section 179 and bonus depreciation limits. This means you can generally write off 100% of the cost in the year the vehicle is placed in service, as long as the vehicle is used 50% or more in business.
If you or an employee use the vehicle for personal use — such as running a personal errand or going out to eat after work — make sure you’re tracking those personal miles and including the value on the employee’s W-2 at year-end.
Deducting Business Use of a Personal Vehicle
Now, let’s say you instead purchase a new vehicle personally but occasionally use it for work. In that case, you can deduct part of the cost of operating the vehicle as a business expense.
There are two ways to calculate your deduction:
Standard mileage rate
Multiply the miles driven for business during the year by a standard mileage rate. For 2022, the standard mileage rate is 58.5 cents per mile for business.
For example, suppose you drove your personal vehicle 1,000 miles for business in 2022. In that case, your deduction using the standard mileage rate would be $585 ($0.585 x 1,000).
Actual expense method
When you use the actual expense method, you track the actual costs of operating your vehicle for the year, including fuel, repairs and maintenance, insurance, registration fees, and interest on your auto loan. Then you multiply those expenses by the percentage of miles driven for business.
For example, if you drive 10,000 miles in 2022 and 1,000 of those miles were for business, your percentage is 10%. If your total vehicle costs were $9,000 in 2022, your deduction would be $900 ($9,000 x 10%).
Whether you use the standard mileage rate or the actual expense method, you need to track your mileage. You can do this with a paper log or an app. (QuickBooks Online’s mobile app includes a mileage tracking feature.)
Of course, tax deductions aren’t the only factor to consider when purchasing a business vehicle. You should approach any business expense with an investment mindset and consider whether it’s really necessary and your expected return.
If you need help deciding whether you should buy a business or personal vehicle, reach out to us! We can help you run the numbers and ensure you have the right systems and processes in place to maximize the tax benefits.
