Buying or leasing a company car — or putting your own vehicle into service — are all viable options for small-business owners. But how do you navigate tax deductions, insurance, and other red tape? Here are the basic ins and outs of using any vehicle for work-related purposes.
Claiming Tax Deductions
As a small-business owner, you can claim expenses related to your vehicle on your annual federal income-tax return in one of two ways: Use the standard mileage deduction, or deduct the actual car expenses.
If you use a vehicle for personal and business use, you may deduct the number of miles driven, or the percentage of your total operating expenses related to business use. For example, if you drove 20,000 miles in a year and 12,000 were for business use, you may claim either the standard deduction for those 12,000 miles or 60 percent of your allowable car-related expenses. (If your business has five or more vehicles, you may not take the standard deduction.)
Allowable expenses may include depreciation, licensing, repairs, tolls, and parking fees. Because of the tax benefits that come with depreciation, it may be cheaper over time to lease a business vehicle rather than purchase one. For more information on the tax considerations of business vehicles, see IRS Publication 463 [PDF]. (If you use any vehicles
for business purposes only , you may also qualify for a Section 179 deduction.)
Purchasing a Vehicle Under Your Company Name
To purchase a vehicle that belongs to your company, the company must be registered as an LLC or another legal business entity. You should also have an Employer Identification Number from the IRS; you can apply for one online, free of charge.
Once you have an EIN, establish your small-business credit file through Dun & Bradstreet. It may take two years or more to build up enough business credit to qualify for a vehicle loan. (Even if you pay cash for the vehicle, a formal business structure is still required.)
The type of vehicle you choose should clearly benefit the business. Purchasing a Corvette with company funds could be a red flag for IRS auditors, unless you can prove that your business needs a luxury sports car.
Buying From the Manufacturer
In some cases,
buying directly from the manufacturer is possible — but there are restrictions. Ford, General Motors, and other automakers have websites dedicated to fleet purchasing. Ford requires that you either own 15 cars or have purchased at least five Ford vehicles in the past year. If your company doesn’t need that many vehicles, find a local dealership with experience dealing with businesses.
Registering Your Company Vehicle
State registration requirements differ based on the gross tonnage of the vehicle, it’s intended use, and whether or not you will operate the vehicle out of state. You will likely have to show proof of insurance as well as complete IRS form 2290 if the weight of the vehicle is more than 55,000 pounds.
When you purchase a company vehicle, make sure to pay for it from your business account and have all documents drawn up in the name of your business. Some dealerships have commercial sales departments that specialize in assisting business owners with the process of purchasing and registering vehicles.
Do you use a vehicle primarily for business? Commercial auto insurance may be in order. Do you use your personal vehicle part-time for business? Personal auto insurance may be appropriate.
Both types of policies are available through the major insurance companies like Progressive, Geico, and Allstate. Consult with the agent who handles your other business insurance policies if you add a business vehicle.