While providing company cars can indeed be a valuable fringe benefit for owners and employees of small businesses, it's important to note that tax rules and implications can change, and they may vary depending on the jurisdiction.
The Perks
It is true - current federal tax rules make the benefit more valuable than it was in the past. Here are a few other benefits to utilizing company cars for your employees.
Businesses can generally deduct the cost of providing company cars as a business expense, including purchase price, maintenance, and operating costs.
Businesses can also claim depreciation deductions for the cost of the company car over its useful life.
Employees may benefit from tax breaks if they use a company car for business purposes. Deductions may be available for certain business-related expenses, such as mileage, however, they must keep accurate records and adhere to IRS guidelines.
Small businesses may be able to take advantage of the Section 179 deduction, allowing them to deduct the cost of qualifying property, including certain vehicles, in the year they are placed in service.
If the corporation finances the company car through a loan, the interest paid on the loan is generally deductible as a business expense.
At the end of its use, companies can transfer the vehicle's ownership to its employee.
The Rules
Let’s say for example, a corporation decides to supply the owner-employee with a company car. The owner-employee needs the car to visit customers, check on suppliers, and meet with vendors. He or she expects to drive the car 8,500 miles a year for business and also anticipates using the car for about 7,000 miles of personal driving. This includes commuting, running errands and taking weekend trips. Therefore, the usage of the vehicle will be approximately 55% for business and 45% for personal purposes. Naturally, the owner-employee wants an attractive car that reflects positively on the business, so the corporation buys a new $57,000 luxury sedan.
The cost for personal use of the vehicle is equal to the tax the owner-employee pays on the fringe benefit value of the 45% personal mileage. In contrast, if the owner-employee bought the car to drive the personal miles, he or she would pay out-of-pocket for the entire purchase cost of the car.
Personal use of a company car is treated as fringe benefit income for employees. This means that the value of personal use is considered additional income for the employee and is subject to taxation. For tax purposes, the corporation treats the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. The company can deduct out-of-pocket expenses related to the company car. This includes costs such as insurance, gas, oil, and maintenance. The deductible portion also extends to expenses related to personal use.
Let's say the company purchases the vehicle in use. Outlays for the business-related portion of driving are unreimbursed employee business expenses, which are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if the owner-employee finances the car personally, the interest payments are nondeductible.
** The Tax Cuts and Jobs Act introduced limitations on the deductibility of business interest expenses for certain businesses. Small businesses may be exempt, but larger businesses may face restrictions.
These are just the basics to understanding the benefits and limitations to utilizing a company vehicle.Â
As Always.... Keep Records
Supplying a vehicle for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use needs to be tracked, valued under the fringe benefit tax rules, and treated as income.
Despite the tax rules and complications, a company-provided car is still a valuable benefit for business owners and employees. It provides transportation for business purposes at a low tax cost while generating tax deductions for the business. Considering utilizing a company vehicle for you or your employees, contact us to discuss the tax implications and how to enroll your cars in service.