If you are operating as an S-corporation, there are really two main options available for vehicle expenses. As with most accounting decisions, the most optimal outcome is dependent upon specific circumstances. This article will hopefully help narrow the options to the one that works best for you.
With this option, your corporation or LLC will own the vehicle. That means that the vehicle is titled in the corporation or LLC’s name, NOT your personal name. In order to take the expenses that are available under this option, it is important that the company actually owns the vehicle. Otherwise, the IRS could very quickly disallow the expenses. It is also important that the vehicle is AT LEAST 50% business use. It should really be closer to 100% business use to take full advantage of the deductions, but the IRS will not allow section 179 depreciation deductions for vehicles under 50% business use. Here are the expenses that are available for company-owned vehicles:
- Depreciation – a portion of the vehicle is expensed each year over five years on your business tax return. This is essentially how you deduct the purchase price of the vehicle on your tax return. There are a few different options for first-year depreciation of a new vehicle, and they are dependent upon the type of vehicle.
- Vehicles that weigh less than 6,000 pounds – these vehicles are eligible for first-year depreciation of up to $10,000. However, if you elect to take bonus depreciation, you can deduct up to $18,000 in year 1.
- Cargo vans, semi-trucks, or vehicles that weigh more than 6,000 pounds – these can generally be expensed 100% in year 1. $25,000 of section 179 depreciation is allowable, plus 100% bonus depreciation. So if you purchase a new Ford F250 or similar type of heavy vehicle, you can generally expense the entire cost in year 1. Remember though, most of the depreciation you take will likely be added back when you trade it in or sell it. It’s a nice tax break for year 1, but can come back to haunt you later down the road.
- Vehicle Repairs & Maintenance – you can deduct the cost of any repairs and maintenance you have for your vehicle. New tires, brakes, oil changes, car washes, etc.
- Gas Expenses
- Car Insurance
- Vehicle Registrations
Company-owned vehicles are generally favorable for people who buy expensive cars and don’t drive a ton of miles each year. It may also be best for people who purchase new cars relatively frequently (5 years or less) because the depreciation deductions will likely outweigh the deductions available for mileage.
Beware of Personal Use
This is where things get tricky. While most business owners would swear they never use their vehicle for personal use, the reality is that most do. If you don’t leave your vehicle at your office or business location, you have commuting miles. The IRS does not consider commuting miles to be “business miles.” When you have any sort of personal miles with a company-owned vehicle, you are required to include in your income an adjustment for the personal use of the vehicle. This can be a significant adjustment for people with expensive vehicles.
Personally Owned Vehicle with Mileage Reimbursements
With this option, you own your vehicle personally and the company reimburses you for any business miles you drive. This option tends to be less messy and relatively simple for most business owners. It’s important, however, to make sure your company has an accountable plan for expense reimbursements drawn up before you start reimbursing for this. The IRS will want to see that your company is allowed to reimburse you for the expenses, which is what the accountable plan accomplishes. Here are the expenses you get to take under this option.
- Business mileage expense – reimburse yourself for business miles driven with your company vehicle. In 2020, the mileage deduction is 57.5 cents per mile. So for every business mile you drive, reimburse yourself 57.5 cents.
- Tolls – reimburse yourself for any toll expenses you incur while driving business miles.
While there are fewer deductions for this option, it can be more beneficial for business owners who drive cheaper cars and put a lot of miles on them. It also makes more sense for people who keep vehicles longer than 5 years. If you’re taking actual expenses instead of mileage, your depreciation deductions end after 5 years. Then you’re just stuck with gas, repairs, insurance, tolls, and vehicle registration. If you instead take mileage reimbursements, you can continue to reimburse yourself as long as you are driving business miles. For people who are driving 10,000 miles and above each year, this is a pretty significant deduction. You will also not have to worry about adding back any depreciation deductions each year.
If you need help figuring out which option is best for you and your business, contact me to set up a consultation.