Using a company car can be quite convenient but don't overlook the tax implications. Let's go over what you should know if you buy a company car for your business. This also applies if you're an employee who uses a company car.
If your business owns the car and you use it, the dollar value of your business driving is a tax-free working condition fringe benefit provided to you by your business. Remember, this is if the business holds the title of the car, not you personally.
The business can then deduct all of the actual car expenses. This can include the depreciation, interest on the car loan, insurance costs and more. You personally can't normally deduct these expenses. But, if your business is a pass-through entity, those deductions can reduce the amount of taxable profit passed through to your personal tax return.
Things can get more complicated if you use the company vehicle for business and personal driving. That personal usage of the car is treated as a taxable fringe benefit. That amount must be added to your annual compensation and income and taxes must be paid on it.
How do you place a dollar value on your personal use of the company car? Luckily, the IRS provides some details about how to value fringe benefits here.
The same rules apply if your business leases the company car you're using. It's a bit easier to place a dollar value on the personal time. Track your business and personal miles, multiply the annual lease payments by the percentage of personal use. You can deduct 54 cents for every business mile (in 2016) you drive but be sure to keep accurate records in case the IRS comes calling with an audit.
If you're a sole proprietor who uses your personal vehicle for business purposes, you can save on your taxes by tracking your miles.
You don't have to worry much if you only use the company car during work hours. If your employer provides you unrestricted use of the company car – including personal and commuting access – that can be considered a fringe benefit. That fringe benefit will have tax implications.
If you don't keep track of your business versus personal mileage, your entire use of the vehicle could be considered a fringe benefit for tax purposes. That's why it's important to keep a proper mileage log‚ this will ensure your actual personal use of the vehicle is accounted for in this process.
Keep in mind that there are some exceptions to this. A small amount of personal use on a car isn't considered a fringe benefit by the IRS. For example, using a company car to pick up lunch between meetings isn't considered personal purposes for tax considerations.
If you're a sole proprietor who uses your personal vehicle for business purposes, you can save on your taxes by tracking your miles and using the