Some businesses require the use of a vehicle to provide their specialized services. Among them are those who work in plumbing, electrical, construction, and similar types of fields, as well as several others which include satellite installation, computer repair, and home health care.
If you’re in need of a vehicle strictly for business purposes, you have a few options. You can buy the business vehicle from a dealership or private owner, you can lease one, or you may even be able to transfer a vehicle you currently own for personal use into your business’s name. When does each make sense?
Buying a Vehicle from a Dealership or Private Owner
If you’re going to be putting a lot of miles on the vehicle, it may be best to buy a new or lightly used vehicle from a dealership or private owner. A vehicle specifically for business purposes gives you the ability to drive however much you need to drive to get the job done without putting additional miles on your personal vehicle or potentially exceeding the mileage allowed under a lease.
Another benefit of purchasing a vehicle for business use is that you’re provided certain tax deductions. Transportation expenses that can be written off when buying a vehicle are covered in the Internal Revenue Service (IRS) Publication 463.
For instance, in this document it states that you may be able to write off the interest paid on a vehicle loan. There are also certain deductions available via section 179 of Publication 463, which is the section that discusses depreciation of the vehicle as long as you use it for business more than fifty percent of the time.
How to Lease a Car Through Your Business
In some instances, leasing a car for your business may make more sense than making a purchase outright. Situations where this may be the case would include if you’re trying to keep the vehicle payment small (since you can usually secure leased vehicles at lower monthly rates) or if you don’t need to drive very far so you’re not concerned with going over your allotted miles.
Should you decide to lease instead of buy, it’s important to understand business car lease requirements. For example, Publication 463 states: “If you lease a car, truck, or van that you use in your business for a lease term of 30 days or more, you may have to include an inclusion amount in your income for each tax year you lease the vehicle.”
To calculate the inclusion amount, you take a percentage of the vehicle’s fair market value and multiply it by a yearly business and investment use percentage. Fair market value is provided by the IRS based on the year the lease began. For vehicles first leased in 2018 or 2019, this number is $50,000 (as opposed to leases beginning back 2013 to 2017, which have fair market values of $19,000).
Transferring Your Personal Vehicle to the Company
Maybe you have a vehicle that you previously purchased for personal use, but now you want to use it for business. As long as the vehicle meets your business needs—such as having the room necessary to carry equipment and/or supplies—it is another option to consider.
If the car was secured via a lease, the IRS still allows for some deductions to the business. The only difference is that, when transferring a lease, the vehicle’s fair market value is determined by the date the vehicle was turned over to the company versus when you first leased it.
Additional Tax Benefits of Business Vehicles
There are also a few additional tax benefits to consider when it comes to business use of vehicles. Because these deductions change every year, and because they are so complex, it is important to talk to your accountant or a tax attorney before buying a vehicle so you can learn how to maximize the deductions for your business specifically.
That said, there are a few business vehicle tax benefits for 2019 that will give you an idea of what you might be able to expect. The first is that you can either seek deductions via the current standard mileage rate or you can get a tax break based on actual costs paid to maintain the vehicle.
The 2019 standard mileage rate is $0.58 per mile. Miles that count for business purposes include traveling to and from meetings with clients, running errands for the business (such as going to the bank or to purchase supplies), and meeting with professionals for business matters. You cannot deduct mileage for driving to and from work, nor can you write off any miles driven for personal reasons.
If you choose to write off actual costs instead, you can deduct a variety of other vehicle expenses. Among them are interest paid on auto loans, registration costs, and property tax fees. You may also be able to deduct expenses related to vehicle maintenance and repairs, parking, and toll fees.
There are also certain tax considerations when leasing a car for business. The thing to remember with this is that you can’t write off the lease payment if you use the standard mileage rate. If you choose to deduct actual auto-related expenses, you can’t depreciate the vehicle.
To learn more about tax deductions for business use vehicles, visit the IRS’s web page for business use of cars or review the IRS Revenue Procedure 2019-26.