Your Tax & Business Advisor
Deducting a Company Car
By Raymond S. Kulzick, CPA, DBA
As published in the Pinecrest Tribune May 17, 1999.
Can my small business deduct a company car?
Sometimes yes, sometimes no. Because of perceived abuses of company vehicles, Congress has passed several highly restrictive and complex laws involving company owned vehicles. The IRS has followed up with a number of complicated rules defining what can be deducted and how. Additionally, the IRS defines an "auto" to include not only cars, but also light trucks and vans.
In general, if the vehicle is used only (100%) for business, it may be owned by the business and fully deducted. If the vehicle is used less than 50% (based on miles driven) for business, it may not be deducted by the business, but the business may reimburse the owner of the vehicle at either the standard mileage rate or actual mileage cost.
For cases where business use is more than 50% but less than 100%, the vehicle (and ALL its costs) may be owned by either the business or the individual, with the other party reimbursing the owner for their share of the usage. It is also usually acceptable for the business to own the vehicle, deduct 100% of its costs, and provide the personal use portion to the employee as a fringe benefit. This personal use, however, must be added to the employee's W-2 and appropriate taxes paid on it by the employee. This is a common method in large companies, but also can be used in small businesses.
It is NOT acceptable for the business to pay part of the costs (for example gas and insurance) and the employee to pay part (for example to own the car) as an "estimate" of each party's share of usage.
There is also NO difference in the requirements if the vehicle is leased rather than owned, although the methodology used to arrive at an allocation of costs may be somewhat different.
Auto usage is separated into three categories by the IRS and strict, daily mileage records MUST be kept. These categories are business use, personal use (such as driving to the grocery store), and commuting to and from work (a personal cost).
Company vehicles can be a valuable fringe benefit in the small business; but, they can be a tax and audit trap for the unwary. If you are deducting a company car, it is important that adequate records be kept and that IRS rules are followed.
Where alternative approaches are allowed by the IRS, professional assistance could prove beneficial in selecting the method most advantageous to you. Once a method is selected (usually by using it on a tax return you file), it cannot be changed, although there may be exceptions.
Raymond S. Kulzick is a CPA, and technology and management consultant with offices in Pinecrest at 12177 S. Dixie Highway. If you have questions or suggestions for future columns, please contact him at 305-233-2280 or rkulzick@kulzick.com. More information is also available on the firm's Web site at http://www.kulzick.com.
This article provides information of a general nature only and should not be acted upon without seeking appropriate professional advice concerning your specific situation.
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© Copyright 1999 Raymond S. Kulzick. All rights reserved. 990315.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.