Are you driving a rolling tax break? Did the decision to buy the trendy sport utility vehicle instead of the sedan cost your business more than just the difference in sticker price? Does the IRS care if you drive a company-registered vehicle on vacation?
The answers to these questions all hinge on how the car is registered: as a personal vehicle or as a company car. Just because the car is registered to a company doesn't mean it can't be used for personal trips, and likewise, a personal car can still have some tax benefits when it's used for business purposes. There are advantages for each case, depending on how the vehicle is used.
"It makes a lot of sense if it's an exclusive business use, that the vehicle be owned by the business," says Mark Luscombe, principal analyst for the federal and state tax group of Chicago-based CCH Inc., a provider of pension, tax and business law information. "If it's owned by a business, it's a business expense and a depreciation schedule applies. Whether it's owned by a business or an individual, it's not like it makes a huge difference, but it is easier to support the tax position."
If the car is owned by the business but is also used for personal trips, then you get into allocation issues. The IRS views the use of a company car as a form of compensation to the person using it, so the value of that use has to be calculated. The cost of leasing a comparable vehicle is used for this purpose, and is multiplied by the percentage of personal use. For example, a company-registered car that would lease for $400 a month is used 50 percent of the time for personal use. That amounts to the equivalent of an extra $200 per month (50 percent of $400) the user of the vehicle must claim as compensation on his income taxes.
The same type of calculation is made if the car is a personal vehicle used for business purposes, but in this case, the owner may either keep track of each individual expense-oil changes, tires, gas etc.-or claim the 32.5 cents per mile deduction allowed for business travel.
Commuting expenses are not considered business expenses and are not deductible for personal vehicles, but in some cases, a vehicle registered through a company may be allowed some deductions.
"In terms of whether one way of registering a vehicle is more advantageous over another, they usually tend to work out about the same," says Luscombe.
Liability protection can be an advantage in some situations.
"If you have a corporation for another reason, it's advantageous for the company to own the car," says Susan Jacksack, a small business analyst and attorney with CCH. "If the car is in an accident, then the liability is to your business assets, not your personal assets. That's typically the reason that construction vehicles are registered under the company. It's not enough of a reason to incorporate a business for, but if you've incorporated, then it's another advantage."
What kind of vehicle you buy can also affect the tax savings. Because of IRS definitions of what a passenger auto is, a sport utility vehicle that weighs more than 6,000 pounds is not subject to the limits set for cars. If the SUV is used more than 50 percent of the time for business, $18,500 can be written off in the first year, compared to the first year limit of $3,160 for a car. If you're considering a vehicle to use for hauling people or cargo as well as some personal use, then a larger SUV may be worth considering.
For companies with locations in more than one state, there may be tax advantages to buying and registering vehicles in one location over another, so ask an accountant or financial expert for advice before making a decision.