Most businesses use vehicles—cars, trucks, or vans—to conduct their activities. For example, on Schedule Cs for self-employed individuals in 2015 (the most recent year for statistics), deductions for car and truck expenses was nearly $90 billion!
There are numerous tax-related issues for using vehicles in your business. Here are 10 of them:
1. Should you buy or lease the vehicle?
The decision involves not only tax considerations, but also financial ones. Leasing usually allows you to use a more expensive vehicle for less cost than buying. But if the vehicle is going to be driven more than 15,000 miles a year, leasing may not be practical.
Taxwise, the full lease cost is deductible (minus an “inclusion amount” for expensive vehicles). In contrast, depreciation for a vehicle that’s purchased may be limited to a set dollar amount (e.g., dollar caps on depreciation apply when vehicles purchased in 2018 exceed $50,000).
2. Who should own it?
Should a business vehicle be owned by the business or an owner? In a corporate setting, the corporation usually should have title to the vehicle because the owner cannot tax any deduction for employee business expenses (e.g., vehicle-related costs) through 2025. For a partnership or LLC, a different answer may apply; owners here may be able to take their unreimbursed costs as a write-off on Schedule E of Form 1040. But business-owned vehicles may have higher insurance costs.
3. Which vehicle should you get?
Obviously, you need to choose the type of vehicle suited to its use in the business. For example, a tradesperson may want a pickup or van to handle tools for the job.
Special tax rules apply to heavy SUVs (those weighing more than 6,000 pounds but not more than 14,000 pounds). These write-off rules permit the cost to be fully deducted in the first year, regardless of the cost of the vehicle.
Consider that a plug-in electric powered vehicle may entitle you to a federal tax credit for the purchase. However, the amount of the credit for Teslas and GMs is being phased out.
4. Should you use the IRS mileage allowance?
In figuring the tax deduction for use of a business vehicle, you can deduct the actual expenses or use an IRS-set mileage rate. The IRS rate for 2019 is 58¢ per mile. Which option is better depends on factors such as the cost of the vehicle, the miles driven, and various operating expenses.
5. What happens if bonus depreciation is claimed?
The amount of depreciation claimed on a vehicle is capped at a dollar amount for so-called luxury vehicles (e.g., in 2018, those costing more than $50,000). If you buy such a vehicle in 2019, you can deduct an additional amount reflecting 100% depreciation. However, if you do, technically, you’re barred from any further depreciation until the end of the recovery period. Fortunately, the IRS has created a safe harbor to permit write-offs throughout the recovery period.
6. Should you trade in an old vehicle?
In the past, when you traded in an old vehicle when purchasing a new one, you could avoid reporting any gain by opting to adjust the basis of the new vehicle (which would limit write-offs for the new vehicle). However, the Tax Cuts and Jobs Act ended like-kind exchange treatment for property other than realty, thereby killing the tax-free trade-in option.
You’re going to be tax on any gain when you dispose of an old vehicle; gain is the difference between what you receive for the vehicle and its tax basis (which is zero if the vehicle has been fully depreciated). You may be able to obtain more for the vehicle if you sell it to a third party rather than trade it in at the dealership where you buy a new vehicle, although this may be more trouble than it’s worth.
7. Should you donate an old vehicle?
If you no longer need a vehicle for business, instead of selling it you can donate it to a charity. Some charities use the vehicle in its charitable purpose (e.g., donating a vehicle to an automotive school where the vehicle is used in the classroom); some sell the vehicle to raise cash for charitable purposes. Check tax rules for this on Form 1098-C.
8. Should you have employees drive their personal vehicles on company business?
If you do, be sure you understand liability issues. From a tax perspective, you probably want to reimburse employees for their business driving using an accountable plan. In this way, the company deducts expenses without incurring payroll taxes on the reimbursements. The rules for accountable plans are in IRS Publication 463.
9. Can you deduct commuting costs?
Commuting costs are nondeductible personal expenses. However, if you have a home office, then driving from home to any business location (e.g., a customer, the bank) is deductible.
10. Are vehicle taxes separately deductible?
Sales taxes paid on the purchase of the vehicle are not separately deductible. They are added to the cost of the vehicle and recouped via depreciation.
If you own the vehicle and pay state personal property taxes on it, you can separately deduct these taxes. A self-employed individual takes them on Schedule C. If you’re an employee of your corporation, claim them as an itemized deduction on Schedule A (Form 1040).
Talk with your CPA or other tax adviser about the best way to handle your need for a business vehicle.