Who Should Own a Business Car - the Company or the Employee?

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Who Should Own a Business Car - the Company or the Employee?

A car purchased for use in a business has certain tax advantages for the owner, whether that owner is the business or an employee. But before you buy that car, consider the pros and cons of having the company or the employee owning the car. There are tax and other factors to consider in this decision. In this situation we'll look at ownership by a corporation vs. ownership by an employee.

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.

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 a 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 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

    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.

    What about leasing 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. 

    This article on leasing vs. buying a car for business use includes some additional considerations.

    Disclaimer: The information in this article and on this site is intended to be for general purposes, and is not intended to be used as tax or legal advice. Every business situation is different and federal and state laws are constantly changing. Please consult your tax or legal advisor before taking any action that could affect your business.