If you operate your own business and you use a vehicle for business purposes, you are entitled to a tax deduction for the cost of operating the vehicle. But you wonder, who should own the vehicle? You or the company? There are tax and other factors to consider when making this decision.
What Constitutes Business Use
First and foremost, remember that only actual business use of the vehicle is deductible as a business expense regardless of who owns the vehicle. And by “owns,” I’m referring to whose name is on the title to the vehicle. Just having a vehicle titled in the company’s name does not make 100% of its costs a business expense. If there is any personal use of the vehicle, that percentage of use is not deductible.
If your business has an office outside of your home, then you need to be aware that driving to and from that office is not business use. It is commuting and commuting is not a deductible business expense. Also, any miles that you drive to the grocery store, the mall, the doctor’s office, your kid’s school, etc. are not business use miles.
If your business office is in your home, then your business mileage begins from your home and ends at your business destination (perhaps a client’s office). It starts again when you leave that destination and return home. However, if you stop for a personal errand on the way home, such as at the grocery store, your business mileage ends at the store. The remaining miles from the store (or any other place you may stop) are considered personal mileage.
Miles that you travel to the bank, office supply store, to meet with your accountant, to visit a customer or meet with a client are miles driven for business purposes regardless of whether you leave from your home office or your business office. The bottom line is that you must keep accurate records on business miles traveled in order to be able to deduct expenses for business use of a vehicle and have that deduction hold up under audit.
Ownership by Individual
If you personally own a vehicle prior to going into business, you can continue to own the vehicle yourself, you can transfer it to the company as a capital contribution or you can sell it to the company. If you sell it to the company, be sure that your price is reasonable according to the market you are in. If you sell the vehicle to your business for more than you paid for it, you would realize a capital gain on the transaction and be responsible for paying tax on that gain.
If you operate as a sole proprietor or a partnership, then you won’t be putting a vehicle in the business’ name because there is no business separate from yourself (or you and your partner). However, if you operate as a limited liability company or a corporation (C or S) then either you or the business can own the vehicle.
If your company is an LLC or a corporation and you choose to maintain personal ownership of the vehicle, be sure to create a vehicle lease document that spells out which party is responsible for what expenses and how those expenses will be paid. If you pay the expenses yourself, then you can request reimbursement from your company using the standard mileage rate method. But remember that the reimbursement must be for business use miles only. In this case, the corporation gets a deduction for vehicle expenses paid, and the reimbursement is not reportable as taxable income to you. If you choose not to have the company reimburse you, then you can use either the standard mileage rate method or the actual expense method and take a deduction on your personal tax return for the business use portion of the expenses. You may have to do some math to determine which method is more beneficial.
On the other hand, the company can pay 100% of the expenses but only the business use portion can be taken as a tax deduction. For example, if the vehicle is used for business purposes 70% of the time (calculated by miles driven) and for personal purposes 30% of the time, only 70% of the total expenses can be deducted for tax purposes.
One thing to be cautious of if you do decide to maintain personal ownership of the vehicle is that you could open yourself up to personal liability if you were to be involved in an accident. Having your entity as the owner of the vehicle is a way of shielding personal assets from business liability.
Also, if you are a single-member LLC and you file a Schedule C with your personal tax return then you are considered a self-employed owner (just like a sole proprietor) for tax purposes.
Ownership by Company
In general, if a vehicle is used less than 50% for business purposes, then it cannot be deducted by the business. In that case, there is no benefit for the business to own the vehicle and retaining personal ownership is more appropriate.
If business use of the vehicle will exceed 50% and you do decide to make your company the owner of the vehicle, be aware that any personal use of the vehicle is taxable compensation to you and should be reported on form W-2 or 1099 at the end of the year. In this case, your income for personal use of the vehicle will be determined based on the market value of the vehicle, not on the actual expenses or standard mileage rate used to determine the deduction. The company can then deduct all of the operating expenses of the vehicle without regard to the business use percentage. The company’s deduction for the personal use percentage is treated as a compensation expense.
From a liability standpoint, the objective is to protect personal assets from business liability so having the vehicle owned by the company is a good way to do that. If a lawsuit were to be filed as a result of an accident, the company would be responsible for all insurance-related matters. However, if you have substantially more assets than the company and you were using the vehicle for personal purposes at the time, the courts could apply the doctrine of piercing the corporate veil and allow personal liability. So, be cautious when using your company owned vehicle.
For insurance purposes, it may be more beneficial for the company to own the car because it may be able to obtain better insurance rates than you could personally, especially if you have young drivers in your household. Also, if you’re going to be buying a vehicle, an entity may be able to obtain more favorable interest rates when financing than you could personally.