Deducting Vehicle Expense
Tax laws for company owned vehicles are relatively straightforward.
In basic terms, a company can deduct vehicle costs either by using the actual expense method or the standard mileage deduction method:
- Actual Expenses: The actual costs for gas, maintenance, insurance in other words, operating costs (aside from the purchase of the vehicle) are tracked and shown as an expense. If company records show that actual costs total $2,369, then $2,369 is shown as vehicle expense, regardless of how many miles were driven. In addition, the price paid for a company-owned vehicle can be depreciated over time until that purchase cost is recovered.
- Standard Mileage Deduction: A credit is given for each mile the vehicle is driven. The standard mileage deduction accounts for all operating costs as well as depreciation; the only items excluded are parking fees, tolls, interest payments, and property taxes.
The IRS allows a company to choose either method of reporting, but, if a company chooses to report vehicle expense using the Actual Expenses method for the first year of ownership, it cannot decide to switch to the Standard Deduction method in subsequent years, even if that change would provide tax advantages. If the company currently takes the Standard Deduction it can switch to using the Actual Expenses method if the vehicle is owned (but not leased.)
The rules for small business owners or for employees who use company vehicles can be more complicated. Let's use the following example to illustrate the basic points and determine when to use the Actual Expenses method or the Standard Mileage Deduction Method:
A company purchases a vehicle for an employee to use for business purposes.
The 2009 standard mileage deduction rate is 55 cents per mile (the IRS changes the rate almost every year.); the company can deduct 55 cents for every qualified mile the employee drives.
The first problem is determining the expense method to use. The Standard Mileage Deduction is truly a standard deduction: It applies to any car or truck, no matter how expensive or inexpensive that particular vehicle may be to operate.
Since this is the first vehicle the company has ever purchased, it has no sense of the total costs of vehicle operation on an annual basis. The American Automobile Association (AAA) performs an annual evaluation of vehicle operating costs, taking into account gas, repairs, preventive maintenance, tires, licenses, and depreciation. Estimates for 2009:
Miles per year
|Small sedan||55.0 cents||42.1 cents||35.4 cents|
|Medium sedan||70.2 cents||54.0 cents||45.5 cents|
|Large sedan||86.8 cents||65.8 cents||54.9 cents|
|Average||70.7 cents||54.0 cents||45.3 cents|
The problem is easy to spot. If the company has purchased a small car that will be driven approximately 15,000 miles a year, the Standard Mileage Deduction may be generous and therefore the best method to choose. If the company purchased an SUV that will be driven approximately 10,000 miles a year, the standard deduction will not cover operating costs. Using the Actual Expenses method may make better sense.
To ensure it makes a wise choice, the business will use the first year to build a history and make the right decision based on an objective analysis.
Calculating the Standard Mileage Deduction is simple: Total all business use miles, multiply by 55 cents per mile, and add any parking fees or tolls paid during the course of business use. The total equals the Standard Mileage Deduction.
To evaluate the Actual Expenses method, the company will track by keeping detailed records and receipts actual expenses for gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments), parking fees, and tolls. Vehicle depreciation will be dealt with separately, but it does form part of the analysis (depreciation is factored into the Standard Mileage Deduction rate).
The next step is straightforward: Which method saves the most money? The company can choose to use whichever method provides the greater tax savings.
Personal use of Company Vehicles
Personal use of company-owned vehicles does not need to be reported as income on employee W-2 tax forms as long as:
- The car was used exclusively for business (no personal use miles driven)
- Personal use is too minor to properly track
- The employee reimburses the company for personal use of the vehicle
- The company maintains a written policy prohibiting any personal use of company vehicles by employees, their families, etc.
Otherwise, the value of personal use is reported as taxable wages. See an accountant for guidance on which method of reporting best applies to your company's and employees' specific circumstances.