Companies buy a business vehicle not only for its function but also for the tax advantages. Business use of a vehicle is deductible as a business expense, allowing a company to cut down its hefty taxes. However, having a business car in itself incurs immense costs that may outweigh the financial perks.
Sure, it makes your operations more efficient and gives your employees a safer means of travel than commuting. But in some cases, employees may take advantage of the convenience and use the car for personal purposes such as driving from work to home, or vice-versa.
Hence, you should make careful considerations before buying a company car. Note not just your uses for it, but also its brand, size, engine, aesthetics, and more. Just because it’ll be owned by a business entity doesn’t mean you should forego the finer details.
And as to how a company car may affect your profits, here’s what the facts reveal:
Taxes Deductions: The Biggest Benefit
Whether the company or an employee owns the business vehicle, it’ll be subject to tax deductions, granting your company cost savings. The deductions come in two parts, which are:
- Deduction from owning the car
- Deduction from the costs of driving the car for business
Note that it specifically says “for business,” meaning personal travel isn’t deductible. If your company owns the car, its cost as a business asset and the costs of using the car will be both fully deductible from your business taxes. On the other hand, if an employee will own the car, its cost as an asset won’t be deductible, nor are the interest expenses of the SME financing.
Business driving expenses are reported on Schedule A of Form 1040 of the IRS. But there’s a catch: the costs are only deductible if they exceed 2% of your adjusted gross income.
You can also deduct depreciation expenses at the rate established at the time you begin using the car. You can also deduct general auto expenses for business use of the car, such as maintenance, fuel, and tires. And, since it’s your company that’ll own the vehicle and not an employee, the interest on the car loan can also be deductible.
Moreover, insuring a company-owned car may be cheaper than insuring an employee-owned one. This is because insurers can offer companies leased-car and multiple-car rates and other discounts.
How to Maximize the Advantages of a Company Car
1. Consider Size
You may get a bigger tax break if you buy a qualifying SUV or pickup truck. Such types of vehicles may grant you eligibility for a Section 179 deduction, which can go as high as $25,000 for a “heavy” SUV, pickup truck, or van for business. However, this deduction only applies to the first year of using the vehicle and provided that it meets all the IRS’s specifications.
Furthermore, a heavy vehicle can also give you a first-year bonus depreciation, specifically if you bought it brand-new. But your deductions can’t exceed your total net business taxable income for the year.
2. Choose the Necessary Add-ons
Depending on the type of journeys you’ll make, specific add-ons may be necessary. For instance, if you’ll mainly use the vehicle for long-distance drives, satellite navigation may be essential. Cosmetic add-ons, like alloy wheels and a metallic paint job, aren’t essential but potentially useful in delaying depreciation and invoking a sense of prestige for your brand, particularly if you serve affluent clients.
3. Prioritize Fuel
Before buying, consider if your options are fuel-efficient. Use an online miles-per-gallon calculator to check. Buying a high-end model may be justifiable for your company’s image, but if you’d only use it to travel between offices, then its pricey engine is likely going to be a waste.
4. Monitor Personal Use
Even if you state that your company car is strictly for business purposes only, personal use will be inevitable at times. To avoid racking up your vehicle expenses, require your employees to keep a daily travel log, wherein they’d list all mileage driven, destinations, and the reasons for each trip. This procedure can allow you to reduce waste and let you track down serious issues within your organization.
Make your employees liable for the costs of personal vehicle use. Even a token charge can make a huge difference, as it’ll let your employees know that you’re serious about minimizing the excessive and unnecessary use of your company car.
Lastly, ensure that any employee driving the car has good records, meaning ample experience in driving and disciplined behaviour. A car crash caused by an irresponsible employee won’t just blow up your insurance costs but also tarnish the reputation of your company.
Despite the meticulous considerations and heavy monitoring you have to make, a company car is still worth it. As long as you actively monitor its costs and regulate its use, the pros outweigh the cons.