Business owners are often faced with several questions when it comes to the acquisition of a vehicle that will be used both personally and in the business. Some of these questions, which are discussed in greater detail below, include:
Whether using the standard mileage deduction or deducting the actual expenses, a mileage log is critical in order to be able to compute and support the business deduction. If using a vehicle for personal and business, it is necessary to divide the expenses between the two uses. The personal use portion should be included in that employee’s W-2 as a taxable benefit.If one wants to use the standard mileage rate for a newly purchased vehicle, one may do so beginning with the first year. Then, in later years, one can continue using the standard mileage rate or change to the actual expense method. If choosing to deduct the actual expenses, it is usually not allowed to then switch to the standard mileage rate. The 2018 standard business mileage rate is 54.5 cents per mile.The standard mileage rate is not allowed if:
For the actual expense method, the expenses that can be included as a deduction are depreciation, licenses, gas, oil, tolls, lease payments, insurance, registration fees, property taxes, tires and/or repairs. Deductible expenses do not include the daily transportation related costs of traveling from one’s home to a regular place of business. These costs are nondeductible commuting expenses.As a general rule, a business can claim an annual depreciation deduction for the cost of a purchased company automobile. The depreciation deduction is usually based on a five-year life but could be limited if the vehicle meets certain criteria. The depreciation will be limited if the vehicle meets the definition of a passenger automobile, which is any four-wheeled vehicle with the intended use on public roads with an unloaded gross vehicle weight of 6,000 pounds or less. The cost of the vehicle, plus sales tax and improvements, equals the capital expense to be depreciated. Special rules apply if the vehicle is used for less than 50% business use.Some of the various items to consider when deciding between purchasing or leasing a car are:
If leasing a vehicle for 30 days or more, an inclusion amount may need to be added to taxable income. The taxable income increases because the inclusion amount reduces the deductible portion of the lease payment.The best method for each situation will depend on factors such as the number of annual personal miles driven, value of the car and the ratio of personal miles to total miles. The rules relating to company vehicles are complex, and proper documentation is key in substantiating vehicle related deductions. If you would like assistance with thinking through these options, please reach out to your Elliott Davis advisor.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.