Use of a Vehicle
businesses are faced with making decisions about transportation
issues. One of the easiest ways for a business to handle
business driving expenses is for employees to drive their
own cars for work-related purposes and obtain reimbursement
from the company. Reimbursements are deductible by the business
and are tax-free to employees, providing that driving expenses
are adequately documented by employees.
best way to document driving expenses is with a log that
records the number of miles driven, the business purpose
of the driving, and the actual cost incurred (for example,
tolls and parking). Reimbursement may be provided at the
standard mileage rate, which is changed every year (plus
tolls and parking), or on the basis of the actual documented
driving program that reimburses employees for the use of
their own cars may provide the best combination of tax benefits
and ease of administration.
it is not possible for employees to drive their own cars.
They may not own a car or have access to a car or the car
may not be suitable for business purposes. In these cases
the company may provide cars for business driving.
COMPANY-OWNED OR LEASED CARS
that obtains a car through buying or leasing solely for
business purposes have specific deductions. There is a difference
in the tax treatment of either buying or leasing.
company leases a car, it can deduct the full amount of the
lease payments as a business expense, no matter how expensive
it may be. However, if the car’s value is more than a certain
amount, an amount will be added back into the company’s
income, partially offsetting its lease payment deduction.
This amount is based on the car’s value and is determined
from IRS tables found in IRS Publication 463, Travel,
Entertainment, Gift, and Car Expenses. The differences
in the tax benefits obtained from leasing rather than buying
are very slight.
taxes when making the lease/buy decision by examining Publication
463 and comparing the expected net tax deductions from buying
and leasing. However, you should not let taxes override
major business and financial considerations.
LUXURY CARS AND TRUCKS
for very high priced luxury cars are limited.
that weigh more than 6,000 pounds are considered trucks
under the Tax Code and are not subject to these restrictions.
Depreciation deductions for these vehicles may be greatly
accelerated compared with those for a car of the same price.
SELLING THE CAR
depreciation deductions for company cars are restricted,
the company’s tax basis of the car (the cost of the car
minus the depreciation claimed for it) is often higher than
the car’s market value. This means the company can claim
a loss deduction on the sale of the car because taxable
gain or loss from a sale is determined by subtracting the
tax basis from the sale price.
deductions on the sale of luxury cars can be quite large
because relatively little depreciation has been allowed.
company trades in an old car toward the price of a new car,
it loses its current loss deduction. The trade-in is considered
an exchange of property instead of a sale. Since no sale
actually occurs, there is no tax loss. The basis of the
old car is simply included in the basis of the new car.
selling a car that has been used for business, be sure to
check its tax basis relative to its market value. If the
basis is higher, you may want to sell the car for cash,
deduct the tax loss and apply the cash toward the cost of
a new car rather than trading in the car.
EXTRA EQUIPMENT RULES
cars are also frequently used with electronic equipment
(cellular phones and portable fax machines). This equipment
is considered to be "listed property" by the IRS
and is subject to special deduction limits. Owners are required
to document the percentage of use for business purposes.
The listed purposes must be used more than 50% of the time
for business purposes.
ISSUES FOR EMPLOYEE USE OF A COMPANY CAR
the company provides cars for employee use, the appropriate
amount of the cars’ values must be included in the employees’
incomes. There are two options:
1: The company can report the entire value of the company
cars in the employees’ incomes and have the employees claim
offsetting deductions on their own tax returns for the cost
of driving the cars. However, some employees will not be
able to deduct the full cost of business driving on their
personal tax returns.
2: The company can allocate into each employee’s income
only the portion of the car’s value that corresponds with
personal use. The company would have to collect from employees
the records needed to show the extent to which they used
their cars for business and personal purposes. A car’s value
may be set at the actual cost that would be incurred to
lease a similar vehicle, or the company can use the IRS
published lease-rate table, which generally produces an
annual value close to 25% of the car’s cost plus $500.