Tax Advantages of Owning a Corporate Vehicle

By Edward A. Haman, J.D.

Tax Advantages of Owning a Corporate Vehicle

By Edward A. Haman, J.D.

Just about every corporation has some use for a motor vehicle. For some companies, it's best for an employee to use their personal vehicle and get reimbursed for expenses. For other companies, it's better, or even necessary, for the corporation to own or lease a vehicle.

Whether your corporation should purchase a corporate vehicle requires a careful analysis of several factors, especially business tax deductions. Here are some things to consider.

What Qualifies as "Business Use" of a Vehicle?

The use of a vehicle for business purposes can range from occasionally using your car to go to the bank or pick up office supplies to having a corporate fleet of vehicles that performs the bulk of the company's business. A corporation that owns several fleet vehicles, such as delivery trucks, plumbing or electrical repair trucks, or buses, will typically buy or lease the vehicles in the corporation's name.

In addition to evaluating the tax treatment, other financial considerations are the costs of insurance and financing, which are often very different for vehicles for personal use than for those used commercially. If you buy insurance that is strictly for a personal-use vehicle and have an accident while using the car for a business purpose, your insurer may be able to deny coverage.

The cost of a vehicle used for your business can be divided into two categories: purchase costs and operating costs. The tax treatment is different for each of these and can also differ depending on the type of vehicle and the nature of your business. For example, special rules apply to buses, taxis, ambulances, and hearses.

What Is Depreciation?

Traditionally, the Internal Revenue Service (IRS) required you to deduct the cost of buying an expensive piece of equipment to be used for several years—such as factory machinery or a vehicle—in annual installments, called "depreciation." For tax purposes, depreciation has nothing to do with the actual market value of the equipment but is simply an allocation of the purchase price over the useful life of the equipment.

For example, if a vehicle is purchased for $60,000 and has a useful life of six years, your business could deduct $10,000 each year for six years. The IRS has rules that determine the useful life of various classes of equipment. IRS rules also allow a business to deduct a higher amount in the early years and lesser amounts in later years.

An alternative to depreciating business property is the Section 179 deduction. Basically, this allows your business to take a deduction for all, or a large part, of the purchase cost in the year of purchase, rather than depreciating it over several years. Section 179 deductions have several qualifications and limitations, some relating to the total amount of deductions and some specifically relating to motor vehicles.

For example, Section 179 deductions are limited to your company's taxable income, so they cannot be used to create a loss for the tax year. However, a Section 179 deduction that can't be used in the first year may be able to be carried over to the subsequent year.

Depending on its type and use, a motor vehicle may qualify for a full Section 179 deduction, a limited deduction, or no deduction. For example, for certain sport utility vehicles, the deduction is limited to $25,500, and special limitations apply to what the IRS deems "luxury cars." State tax rules relating to Section 179 deductions may also apply.

In addition, your corporation may be able to take advantage of what is called "bonus depreciation." This is an increase in the Section 179 deduction for certain vehicles purchased and placed in service before December 31, 2022.

What Are Vehicle Operating Costs?

Operating costs include fuel, oil, maintenance and repairs, tires, tolls and parking fees, interest on a vehicle loan, vehicle registration fees and taxes, and insurance. You should keep careful records of all of these expenses.

Complications arise if your corporate vehicle is sometimes driven by an employee (including a shareholder-employee) for personal use. With such personal use of a company vehicle, your company will need to either limit its deductions to the percentage of business use of the vehicle, or treat the employee's personal use as income to the employee. Combined personal and business use can also cause problems if there is a car accident.

If a vehicle is leased by your corporation instead of being purchased, you will be limited to deducting the lease payments and operating costs. However, special IRS rules apply to leased vehicles, especially if the vehicle is not used 100% for business purposes.

Determining whether to use your personal car for company business or lease or purchase a vehicle for your corporation is a complex matter. You should evaluate the numerous IRS rules relating to the type and cost of the vehicle, how it will be used, and the nature of your business to help you decide.

You may want to read IRS Publication 946, "How to Depreciate Property." But be warned: It's more than 100 pages long. If it leaves you confused, you may want to consult a tax accountant or tax attorney.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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