If you are considering purchasing a car for your business, there are several factors to consider. One of the most important factors is whether the car will be used solely for business or for both business and personal purposes. If the car will be used for personal purposes as well, you may not be able to deduct the full cost as a business expense.
Purchasing a car
Buying a car through your business can be a smart financial decision if it will be used primarily for business purposes.
Per IRS rules, if a vehicle is used for business 50% or less, you cannot use Section 179 or bonus depreciation and must use the straight-line ADS method for that year and all subsequent years. If you meet the more-than-50% test in the first year but the qualified business use drops to 50% or less in a later year, you must "recapture" (include in your income) the amount of excess depreciation you claimed in the prior years. This means paying back the difference between the accelerated depreciation you claimed and the slower Alternative Depreciation System (ADS) straight-line method you would have been required to use.
It may be challenging to justify above 50% use in the eyes of regulatory agencies, especially for health and wellness professionals who work from home and are fully remote. You may be better suited to write off business expenses associated with your personal vehicle at tax time.
Ultimately, the decision to purchase a car for your business will depend on your specific circumstances and needs. Consider the pros and cons:
Pros:
- Claim depreciation on your tax return (if you are using the actual expense method)
- Claim a percentage of the purchase price of the vehicle, the year it’s placed in service as a deduction (this is based on business use vs total mileage)
- Claim actual vehicle expenses as business expenses (fuel, insurance, maintenance)
- Important note: To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for business use. Later, you can choose to use the standard mileage rate or actual expenses. If you start with the actual method in the first year, you are not allowed to switch to the mileage method.
- For a leased car, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose it.
Cons:
- Higher commercial vehicle loan costs and interest rates (note that only interest and loan fees are a business expense; the payments of principal are not)
- Higher commercial vehicle insurance costs
- If you sell the vehicle for more than its depreciated value, you may have to pay capital gains tax
- If the vehicle is not 100% business use, you must keep detailed records of business use and mileage, personal use and mileage, and allocate all expenses based on the business and personal use percentages.
Sole Proprietorship
- Ownership: Since a sole proprietor and the business are considered to be one legal entity, most sole proprietorships cannot purchase a vehicle in the business’s name. Transferring a personally owned vehicle to the business doesn’t legally transfer ownership of the vehicle to the business, as the vehicle is still considered owned by the individual.
- Deductions: A sole proprietor can deduct business-use vehicle expenses using the Standard Mileage Rate or the Actual Expense Method. Tracking mileage to determine which method yields the highest deduction is critical. Make sure you are keeping track of business miles and total miles driven for the year.
S Corporations
- Ownership: The vehicle can be owned by the business; however, there are several restrictions on its personal use. The vehicle can also be owned by the shareholder-employee, who is reimbursed under an Accountable Plan based on business miles driven.
- Deductions: An S Corp can deduct only actual business expenses if it owns the vehicle. If the shareholder-employee owns the vehicle, only the business miles driven can be reimbursed.
- Personal Use Rules: If the S Corp owns the vehicle, the S Corp must track personal use and include the value of the personal use in W-2 income as a taxable fringe benefit. If the business use is 50% or less, the business may be subject to ‘recapture’ depreciation.
What expenses can be deducted for business use?
- Gas
- Oil
- Repairs and maintenance
- Tires
- Insurance
- Registration fees
- Licenses
- Lease payments
- Depreciation
- Interest portion of vehicle loan payments
Note: Parking and tolls are separately deductible.
How to calculate the percentage of business vs personal use
The IRS states, “If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expenses based on the miles driven for each purpose.”
Miles for business use
__________________ x 100 = business use percentage
Total miles
What documents are required to support the tax deductions for a business vehicle?
A log with the following information:
- Date
- Destination
- Business purpose
- Odometer start and stop reading
- Miles for the trip
- Expense type (gas, oil, tolls, etc.)
- Expense Cost
Documentary evidence:
- Receipts
- Cancelled checks
- Bills
Selling the car
When selling the car, if it is still titled in your name, you will be responsible for any taxes or liabilities associated with the sale. However, if you sell the car after transferring the title to the business, the business will be responsible for any taxes or liability associated with the sale (including depreciation recapture).