What are 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 business expenses 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.
Business Taxes and Business Cars
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: the deduction for ownership of the car, and deductions for costs of driving the car for business purposes.
For the owner, the cost of the car as a business asset and the costs for business 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 (even for interest expenses on a car loan). The cost of business driving expenses is reported on Schedule A of Form 1040, but these costs are only deductible if they are greater than 2% of adjusted gross income.
Even if it sounds like the company should own business vehicles, there are other factors to consider.
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.
- If the business owns the car, personal use of the car by the employee must be documented and the company must report personal use as taxable compensation on the employee's W-2.
- Interest on a car loan is deductible to a business as an ordinary and necessary business expense.
- 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 car ownership expenses are deductible as itemized deductions (miscellaneous) on Schedule A if they exceed 2% of adjusted gross income. Other reductions in itemized deductions may affect the expense deductions.
- Interest on a personal car loan is not deductible unless it is part of the proceeds from a home equity loan.
- If you use the car for business purposes and you are reimbursed by your business for these expenses, you cannot also take tax deductions for the expenses on your personal tax return. Only un-reimbursed business expenses may be deductible.
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.
Employee Use of Car for Business - More Information
The recent 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.
For more information on what an employee can deduct for business use of a car for business purposes, read this article by William Perez, Guide to Taxes, on Car and Truck Expenses.
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. Think of it this way: 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.
