Small business owners frequently ask me whether buying a vehicle through their business is a way for them to save on taxes. Writing off car expenses can be a significant tax-saving strategy .. if it is justified and your income supports the purchase.
But there are many more factors to consider other than just having income that supports the purchase. Below we weigh in on the pros and cons and other factors that can determine if it's even a deductible expense.
Do You Really Need a Vehicle for Your Business?
The first question is: Do you use a vehicle for at least 50% business purposes? And, more importantly, is a vehicle necessary for your business operations?
For example:
- If you’re a real estate agent, constantly driving to meet clients, a vehicle is crucial.
- If you’re a social media influencer or engineer who works from home, a car may not be essential.
If you use your vehicle for more than 50% business-related driving, there are tax benefits to explore. If you can not justify more than 50% of your mileage being for a business purpose, we stop here and the answer is no.
Keep in mind, business mileage does not include commuting mileage. So your home to your office and back, those are commuting mileage and do not factor into your "business" mileage.
Personal vs. Business Ownership: What’s Best?
There are tax advantages whether the vehicle is personally owned or owned by your business. But the type of benefit varies depending on ownership.
Reimbursing Yourself for Business Use of a Personal Vehicle
If the vehicle is titled in your name, you can always reimburse yourself for business use. Here’s how:
- Standard Mileage Rate: Deduct a fixed rate per mile driven for business (as determined by the IRS).
- Actual Expense Method: Deduct a percentage of actual vehicle costs like gas, repairs, and insurance, based on the miles used for business.
Note that once you choose to use the Actual Expense Method for a vehicle, you can not go back to the Standard Mileage Rate method. Depending on how long you plan to keep the car may depend on which of these methods you use on your tax return. This is a discussion to have with your tax preparer.
For LLCs and sole proprietors, these deductions go directly on your tax return. For S Corporations, you'll need an Accountable Plan to reimburse yourself through payroll.
However, note that you won’t be able to take advantage of vehicle depreciation unless the vehicle is owned by your business.
Pros of Titling the Vehicle to Your Business
When the vehicle is titled in your business’s name, there are extra tax advantages:
- Depreciation: You can deduct the business-use percentage of the vehicle’s value over time. Current tax code allows for accelerated depreciation of upwards of 100% of the cost in year one depending on the car type and the tax year.
- Expense deductions: You can deduct a portion of fuel, maintenance, insurance, and other costs based on the business use.
Cons of Business Ownership
- Higher insurance costs: If the vehicle is titled to the company, you must have commercial auto insurance. Insurance premiums for business-owned vehicles are generally higher than personal auto insurance.
- Capital gains on sale: If you sell a business-owned vehicle, you may owe capital gains tax on the sale. If you depreciated the vehicle to nothing, you have a very low book value left. Any sale will likely trigger some capital gains. Personal vehicles, on the other hand, are not subject to this tax. If you sell a car that is owned by you, there is no capital gain tax, at all.
Financing Considerations: Will the Dealer Allow Business Titling?
If you’re financing the vehicle, be aware that many dealers will not let you title the vehicle to your business while keeping the loan in your personal name. In most cases, if the vehicle is titled to your business, the loan must also be in your business’s name. This may require separate credit approval, and your business credit could impact the loan terms.
Purchasing an Electric Vehicle (EV) Through Your Business
If you're thinking about buying an electric vehicle (EV) for your business, there's another potential benefit: the EV tax credit.
Even if your personal Adjusted Gross Income (AGI) makes you ineligible for the EV tax credit, purchasing the EV through your business may allow you to qualify for it. This could offer significant savings and is worth exploring if you're in the market for a greener vehicle.
The EV tax credit can be a substantial financial incentive, so make sure to consult with your tax advisor to determine whether your business is eligible.
What If You Use a Personal Vehicle for Business?
Even if the vehicle is titled in your personal name, you can still benefit from tax deductions for business use:
- Reimbursement for mileage or a percentage of actual expenses as outlined above.
- Accurate mileage tracking: Use tools like MileIQ or a manual log to separate personal and business miles.
Remember, though, that depreciation is only available if the vehicle is titled to your business.
What if I lease the vehicle instead of purchasing it?
Leasing the vehicle in your business name could also be an option. We won't dive into the decision of lease vs. buy factors in this article, but if you can justify business use.... you can deduct that percentage of your lease payments if the vehicle is leased to your business.
Commercial insurance rates still apply if the lease is in the business name.
Keep Track of Mileage
Regardless of ownership, tracking your business miles is essential for claiming deductions. Apps like MileIQ make it easy to track both business and personal mileage, ensuring you stay compliant with IRS rules.
Key Tax Considerations
- Don’t buy a car just for the write-off: If your business isn’t generating significant profit, purchasing a vehicle solely for a tax deduction may not be a good business choice and may also flag you for an audit.
- Vehicle deductions are audited often: The IRS pays close attention to vehicle write-offs, so maintain thorough documentation. Documentation is your friend. Keep a mileage log to support your deduction.
Summary
In summary, buying a vehicle through your business can offer great tax benefits, but it depends on your vehicle use and whether it’s financially smart for your situation.
Is the use of a vehicle in your business justified as being ordinary and necessary to your business?
Profits and business use must justify the purchase.
You can always deduct vehicle expenses related to business use, even if you personally own the vehicle yourself... but depreciation is the big deduction most are looking towards when buying the car in the business name.
Reimbursing yourself for business use of a personal vehicle is always an option, but depreciation and certain credits only apply if the vehicle is titled to your business.
Capital gains only come into play on business-owned vehicles. If you do not plan to keep the vehicle for long-term, keep in mind you may get a deduction today but pay tax on that choice later on.
If you’re financing, make sure the dealer allows the vehicle to be titled in your business’s name if that’s the route you choose.
And as always, consult your tax professional to make the best decision for your business.
