Company or Employee Business Vehicle Ownership
A car purchased for use in a business has certain tax advantages for the owner, whether that owner is the business or an employee. But before you buy that car, consider the pros and cons of having the company or the employee owning the car. There are tax implications and other factors to consider in this decision.
In this situation, we'll look at ownership by a corporation vs. ownership by an employee.
Acceptable Business Expenses for Use of Car/Truck
First, remember that whether the business or the employee owns the car, only actual business use of the car is deductible as a business expense. Commuting expenses between home and business are not deductible and personal travel is not deductible. Whoever drives the car must keep good records on business travel expenses in order to have those miles allowed as a deduction.
Taxes and Business Vehicles
Probably the biggest benefit to either the company or the employee from owning a business car is the cost savings from tax deductions. This deduction comes in two parts:
- Deduction for the act of owing the car
- Deductions for costs of driving the car for business
For the owner, the cost of the vehicle as a business asset and the costs for use of the car are both fully deductible from business taxes. For the employee, the cost of the car as an asset is not deductible—nor are the interest expenses of the car loan.
The cost of business driving expenses is reported on IRS Schedule A of Form 1040. However, these costs are only deductible if they are greater than 2% of the adjusted gross income.
Benefits of Business Ownership of the Vehicle
The company can deduct depreciation expenses at the rate in effect at the time the asset is put into service (begins to be used). The company can also deduct general auto expenses for business use of the vehicle, like maintenance, gasoline, and tires. Also, interest on a car loan is deductible to a business as an ordinary and necessary business expense.
If the business owns the car, personal use of the car must be documented. The company must report personal use by an employee—as an example, they drive the car to and from work—as taxable compensation on the employee's W-2.
Insurance for a company-owned car may be cheaper than for an employee-owned vehicle since businesses can get leased-car and multiple-car rates and other discounts. If a company-owned car is involved in an accident, the driver's personal insurance rates and liability are minimized.
Benefits of Employee Ownership of the Vehicle
Employee ownership of business car expenses is deductible as itemized deductions (miscellaneous) on Schedule A if they exceed 2% of the employee's adjusted gross income. Other reductions in itemized deductions may affect the expense deductions. The interest on the car note is not deductible unless it is part of the proceeds from a home equity loan.
If an employee uses their car for business reasons and they are reimbursed by the company for expenses, the employee cannot also take a tax deduction. Only un-reimbursed business expenses may be deductible.
Also, the employee may need to get a separate auto insurance policy to cover the commercial use of the vehicle. While any personal coverage the employee has may cover some damage, it is unlikely to cover the car if its primary function is for business activities. As an example, imagine a plumbing company that has a business truck used for making calls. If the owner should drive the truck to the store and have an accident, the damage may not be covered because it was not in business use at the time.
In general, having the business own the car allows more deductions, such as depreciation. Most of these deductions are not available to individual employees on their personal tax returns, but there may be specific instances when employee ownership of a car or truck for business use is advantageous.
2017 Tax Law Changes to Deductions
The 2017 tax law changes (in the Tax Cuts and Jobs Act) have affected an employee's ability to deduct unreimbursed business expenses. These changes are effective for tax years 2018 through 2025. Your choice of who should own a car for business might be affected by these changes.
Employees may no longer deduct unreimbursed business expenses, including those for business driving, on their personal tax returns. The IRS has eliminated all miscellaneous deductions (the category where unreimbursed business expenses fall).
All reimbursed business expenses are now taxable to employees. This includes employee expenses for business driving. These payments are considered employee benefits, and they are subject to withholding for federal income taxes, FICA taxes, and unemployment taxes, and they must be reported on W-2 forms.
Payments to employees for car expenses are still deductible to employers as business expenses.
Employees who drive company vehicles can take a deduction for expenses they incur while driving on company business, but NOT for personal driving. To be deductible, these expenses must be unreimbursed by the company.
Remember that, when it comes to costs for business vehicles, you as the business owner can deduct these employee car use costs, and they are tax-free to the employee.
Leasing vs. Buying a Car for Business Use
The same factors may apply if a business decides to lease a car for employee business use. If you lease a car for an employee, you don't have much control over how much mileage the employee puts on that car. Many car lease terms have mileage restrictions.
If you (as the owner) drives a leased car, you may be able to control personal use and keep costs down. Every situation is different, but consider leased cars as perks for owners and executives, and buy cars if employees will be driving them.