The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. The employer receives tax deductions and it also provides tax breaks for the owners and employees who use the vehicles. (And of course, they get the nontax benefit of getting a company car.) Plus, current tax law and IRS rules make the benefit even better than in the past.
The rules in action
Let’s say you’re the owner-employee of a corporation that will provide you with a company vehicle. You need the vehicle to visit customers, meet with vendors and check on suppliers. You expect to drive the vehicle 8,500 miles a year for business. You also expect to use the vehicle for about 7,000 miles of personal driving, including commuting, running errands, and weekend trips. Therefore, your vehicle usage will be approximately 55% for business and 45% for personal purposes. You want a nice vehicle to reflect positively on your business, so the corporation buys a new $55,000 luxury sedan.
Your cost for the personal use of the vehicle is equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the vehicle yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the vehicle.
Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the vehicle much the same way it would any other business asset, subject to depreciation deduction restrictions if the vehicle is purchased. Out-of-pocket expenses related to the vehicle (including insurance, gas, oil, and maintenance) are deductible, including the portion related to your personal use. If the corporation finances the vehicle, the interest it pays on the loan would be deductible as a business expense, unless the business is subject to the business interest expense deduction limitation under the tax code).
In contrast, if you bought the vehicle yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025, due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the vehicle yourself, the interest payments would be nondeductible.
And finally, the purchase of the vehicle by your corporation will not affect your credit rating.
Providing a vehicle for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use must be tracked and valued under the fringe benefit tax rules and treated as income. The tax rules are complex — this article only explains the basics.
Despite the necessary valuation and paperwork, a company-provided vehicle is still a valuable fringe benefit for business owners and key employees. It can provide them the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.