Tax-Deducible Options for Business Vehicle Usage
Businesses have four main options for handling transportation expenses: purchasing a business vehicle, leasing one, reimbursing employees for personal vehicle use via standard mileage deduction, or reimbursing based on actual expenses.
Purchasing a business vehicle makes it a company asset, but you must depreciate it, and there are limits on deductions for certain vehicles.
Leasing a vehicle means it's not a company asset, and you can choose between standard mileage or actual expense deductions, but there are also limits on deductions, and personal use must be restricted to maintain tax benefits.
Reimbursing employees for personal vehicle use can be done through standard mileage or actual expenses, with the latter requiring more complex calculations and documenting business usage.
If you’re an employer whose business relies on frequent vehicle usage, then you’re probably considering the options available to expense your business transportation.
The best option is not always black-and-white, and often depends on the amount of time your employees spend driving, the size of your company, and other tax considerations.
You have four main options for handling business transportation:
Business Vehicle Purchase (Cash or financed): The vehicle will be treated as an asset on your company’s balance sheet
Business Vehicle Lease: You’ll choose how to expense the vehicles cost, but it will not be an asset on your balance sheet
Personal Vehicle Usage – Standard Deduction: The company reimburses the employee for business mileage at the IRS per mileage rate
Personal Vehicle Usage – Actual Expenses: The company reimburses the employee for all actual expenses incurred during/because of business usage.
Business Vehicle — Purchase (Cash or Financed)
The first option is for the business to purchase a vehicle — either with cash or through financing. Any vehicle that you purchase is considered a tangible assets, and it should be put on your balance sheet as an asset.
Passenger automobiles are considered to be listed property, which means the IRS keeps a close eye on how they are used. The general assumption is that the business vehicle should be used 100% for business purposes.
Business vehicles must also be depreciated.
This means that you take a depreciation expense over the vehicle’s life, which lowers the value of the vehicle on your balance sheet. This depreciation expense shows up on your income statement, and lowers your net income.
However, the IRS takes a dim view of people using “luxury” vehicles as company cars.
For that reason, they created a limit on the annual deduction for vehicles which weigh 6,000 pounds or less. This ensures that “luxury” vehicles are not purchased with business funds, in order maximize depreciation and lower net income.
With business vehicles, you can also deduct all expenses from running the vehicle, as any maintenance/gas/etc, is assumed to be for business purposes.
If you allow some personal use of the vehicle, then the easiest option is to expense all of the operating costs of the vehicle throughout the year and treat the personal-use percentage as income to the employee. This is determined based on the vehicle’s market value.
Business Vehicle — Lease
Many companies, however, choose to lease their business vehicles, instead of purchasing them. In this case, the vehicle is not considered a company asset, and for this reason, you cannot claim depreciation on the car.
For leased vehicles, you have two choices when it comes how to expense your costs:
You can deduct standard mileage (currently 0.56 cents/mile for 2021) for the vehicle
You can deduct actual expenses
If you do the latter, then the lease payment becomes deductible.
However, there’s also a limit on the deductions for a leased vehicle, for similar reasons to the luxury vehicle limits mentioned in the previous section.
Once you pick a method, you’ll have to stick with it; you can’t switch as the value of the vehicle changes. It’s best to talk to your tax advisor about which method is best for your company.
If you allow any personal use, you must ensure that the car is still used for business purposes at least 50% of the time. You cannot deduct any expenses for personal use (and the employee must carefully record mileage).
Again, personal use of a company car should be treated as income to the employee.
Personal Vehicle — Standard Mileage
If your employees rarely need a vehicle and you don’t want to maintain a fleet, a better option is to reimburse your employees for business use of their personal vehicle.
The simplest way to do this is the standard mileage rate, which is $0.575 a mile for 2020. This rate is as high as it is because it is intended to cover not just gas but the wear and tear on the vehicle.
Mileage compensation is not taxable income to the employee and can be deducted by the employer.
Personal Vehicle — Actual Expenses
You can also choose to reimburse your employee based on their actual personal vehicle expenses that relate to business travel. This can get complicated, however, and requires calculating the percentage of business usage.
You’d then reimburse the employee for that portion of the vehicle expense. This would include gas, repairs, tires, insurance, etc.
Generally, this method is only better than standard mileage if the personal vehicle is being used substantially and regularly for business use.
For occasional business use (such as driving to a conference once a year), standard mileage is more efficient and requires less paperwork.
Your tax advisor can help you work out the best option.
Split Business vs. Personal Use
The easiest way to handle the accounting for a company-owned or leased vehicle is always to disallow personal use of the business vehicle. However, this can be something employees push back against.
One problem is that the IRS considers commuting to be personal use. If choose to disallow personal travel, then your employees would not be allowed to commute to the office in that vehicle, as the IRS considers this to be personal use.
However, if you choose to allow personal use of a business vehicle, it’s important to be away that this will be considered a taxable fringe benefit. Personal use has to be documented by the employee, usually by keeping a mileage log.
The right approach to the acquisition and usage of business vehicles depends on your company’s needs.
For very occasional business driving, you are often best off reimbursing the employee for the use of a personal vehicle using the standard mileage deduction.
For people who must travel to multiple worksites or who are road warriors a high percentage of the time, buying or leasing a company car can make sense.
