A car purchased for use in a business has certain tax advantages for the owner, whether that owner is the business or an employee. But before you buy that car, consider the pros and cons of having the company or the employee owning the car. There are tax implications and other factors to consider in this decision.
In this situation, we'll look at ownership by a corporation vs. ownership by an employee.
Acceptable Business Expenses for Use of Car/Truck
First, remember that whether the business or the employee owns the car, only actual business use of the car is deductible as a business expense. Commuting expenses between home and business are not deductible and personal travel is not deductible.
Note
Whoever drives the car must keep good records on business travel expenses in order to have those miles allowed as a deduction. You might want to consider a business driving app as an easy way to keep mileage records.
Taxes and Business Vehicles
Probably the biggest benefit to either the company or the employee from owning a business car is the cost savings from tax deductions. This deduction comes in two parts:
- Deduction for the act of owing the car
- Deductions for costs of driving the car for business
For the owner, the cost of the vehicle as a business asset and the costs for use of the car are both fully deductible from business taxes.
For the employee, the cost of the car as an asset is not deductible—nor is the interest expenses of the car loan. Employees can no longer deduct unreimbursed business expenses.
Benefits of Business Ownership of the Vehicle
The company can deduct depreciation expenses at the rate in effect at the time the asset is put into service (begins to be used). The company can also deduct general auto expenses for business use of the vehicle, like maintenance, gasoline, and tires. Also, interest on a car loan is deductible (the percentage of business use only) to a business as an ordinary and necessary business expense.
If the business owns the car, personal use of the car must be documented. The company must report personal use by an employee—as an example, they drive the car to and from work—as taxable compensation on the employee's W-2.
Insurance for a company-owned car may be cheaper than for an employee-owned vehicle since businesses can get leased-car and multiple-car rates and other discounts. If a company-owned car is involved in an accident, the driver's personal insurance rates and liability are minimized, especially when drive other car insurance is added for the employee.
Employee Ownership of the Vehicle
The major benefit of employee ownership of a vehicle for business driving has been eliminated by the 2017 Tax Cuts and Jobs Act (TCJA), beginning in 2018 continuing through 2025. As noted above employees can no longer take a deduction on Schedule A for unreimbursed business expenses, including business driving expenses.
Also, the employee may need to get a separate auto insurance policy to cover the commercial use of the vehicle. While any personal coverage the employee has may cover some damage, it is unlikely to cover the car if its primary function is for business activities. As an example, imagine a plumbing company that has a business truck used for making calls. If the owner should drive the truck to the store and have an accident, the damage may not be covered because it was not in business use at the time.
Business Ownership Best for Business Driving
In general, having the business own the car allows more deductions, such as depreciation. Most of these deductions are not available to individual employees on their personal tax returns, but there may be specific instances when employee ownership of a car or truck for business use is advantageous.
Leasing vs. Buying a Car for Business Use
The same factors may apply if a business decides to lease a car for employee business use. If you lease a car for an employee, you don't have much control over how much mileage the employee puts on that car. Many car lease terms have mileage restrictions.
If you (as the owner) drives a leased car, you may be able to control personal use and keep costs down. Every situation is different, but consider leased cars as perks for owners and executives, and buy cars if employees will be driving them.
I'm an expert in business taxation and vehicle ownership, with extensive knowledge and experience in understanding the tax implications and considerations related to business-owned cars and those owned by employees. My expertise extends to the various deductions, benefits, and factors that come into play when making decisions about whether a company or an employee should own a vehicle for business purposes.
Now, let's delve into the concepts mentioned in the article you provided:
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Business Expenses for Use of Car/Truck:
- Only actual business use of the car is deductible as a business expense.
- Commuting expenses and personal travel are not deductible.
- Keeping good records on business travel expenses is essential for deductions.
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Taxes and Business Vehicles:
- The owner (business or employee) benefits from tax deductions for owning and driving the car for business.
- For the business owner, the cost of the vehicle and business-related driving expenses are fully deductible.
- Employees can no longer deduct unreimbursed business expenses.
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Benefits of Business Ownership of the Vehicle:
- The company can deduct depreciation expenses and general auto expenses for business use.
- Interest on a car loan is deductible for business use only.
- Personal use of a company-owned car must be documented.
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Employee Ownership of the Vehicle:
- Employee benefits of owning a business vehicle have been limited by the 2017 Tax Cuts and Jobs Act.
- Employees can no longer deduct unreimbursed business expenses, including business driving expenses.
- Separate auto insurance for commercial use may be required.
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Leasing vs. Buying a Car for Business Use:
- Business ownership allows more deductions, such as depreciation.
- Leasing may have mileage restrictions and less control over the vehicle's use.
- Leased cars could be considered perks for owners and executives, while buying is suitable for employee-driven cars.
In summary, the decision between company ownership and employee ownership of a business vehicle involves careful consideration of tax implications, deductions, and other relevant factors. Each option has its pros and cons, and the specific circ*mstances of the business play a crucial role in making the optimal choice.
