Small Business Use of Vehicles FAQ: ‘Ask The Experts’

By: Lucrum Staff
November 2022

This is our fifth installment of our ‘Ask The Experts’ series (check out our first, second and third and fourth installments here). Our CFOs and accountants share recent questions they’ve received from small business owners regarding vehicle use for business and their answers. If you have a business use of vehicle question not included here, send it to us!

What type of businesses should purchase company vehicles?

In general, the higher the percentage of time that a vehicle will be used for business purposes, the greater the business case for purchasing the vehicle through your business. This is because the percentage of the time that the vehicle is used for business will be used to determine whether the vehicle qualifies for tax write offs in addition to the amount of the write off. Some common examples of businesses that will want to purchase company vehicles include:

• Delivery firms
• Realtors
• Construction
• Catering/Food Service

If my spouse works for the company, can we buy him/her a car in the company?

If the vehicle is really needed to perform job duties and the spouse works for the company, maybe. However, if the car is primarily used for commuting to and from the office, it’s not worth it for the business to own it for a tax strategy type position. If the vehicle is a van or sports car – can you honestly justify that it is a business asset for one of the above type firms?

But if I don’t buy it through my business, how can I deduct my car?

Reimburse yourself for each business mile you drive – the current standard mileage rate is 58.5 cents per mile. Treat it as if the business is renting your car from you. Use an app like Mile IQ and it makes tracking mileage as easy as swiping left and right on your phone. At the end of each month, finalize your expense report and write yourself a check tax free! Keep good records on the app and this deduction is all but ironclad.

Taxpayers also have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rate. In general, the standard mileage is much simpler to calculate, but actual expenses may be worth calculating in the event they produce a larger deduction. Each year, talk to your tax professional about the best method to use. If you want to use the standard mileage rate, you must use this method in the first year the car is available for business use. Each year thereafter, the taxpayer may switch back and forth between standard mileage or actual expenses.

Should I let employees take their business vehicle home?

This all depends on the business. Think about the distance between a staff member’s home, office and the work site location. Does it make sense for your staff to drive to the office, park and take the company car or truck? Does that impact your response time for your customers or impact employee morale?

Take an HVAC company, for example. If the business would like staff available for after hours calls (for OT or extra pay), they will probably need their truck. What if they are closer to home than the shop on their last call? It may not make sense to drive AWAY from home to the shop then drive BACK to where they were just to continue home. The same goes for the first appointment of the morning. If the HVAC tech can head directly to the first job instead of having to stop by the office first, it probably makes sense to let employees drive their truck home.

If you decide to let employees take business vehicles home, make sure to put in place a formal vehicle use policy and discuss it with employees. Anyone who drives a company vehicle should be drug tested and sign the use policy where they agree to abide by company rules regarding vehicle usage.

My car was damaged when one of my contractors backed up their truck. The contractor offered to pay all of the costs incurred as a result of the accident, rather than going through insurance. Besides the actual repairs to the vehicle, what other types of costs should I include as legitimate expenses to be reimbursed?

All of the following are legitimate costs to asked to be reimbursed for:

• Rental vehicle costs
• Transportation to get home when the vehicle was initially damaged
• Tow truck to get the car to a repair shop
• Actual repair costs to get the vehicle back to original condition
• The insurance companies will sometimes pay out a sum of what they call “loss of value” (only if you ask for it) and because this is quite extensive damage, it might be worth figuring out how that is calculated, if that is even possible.

What are some common pitfalls that businesses should consider when evaluating whether to purchase a vehicle or how to write off vehicle use?

• Luxury auto limitations. The designation of “luxury vehicle” by the IRS applies to vehicles under 6,000 lbs. and these vehicles are subject to limitations on depreciation. Plus, these are depreciated over no less than 7 years. If the vehicle is expensive, it could take well over 10 years to be fully depreciated.
• Not figuring in personal use. Just like using a corporate jet for vacation travel is an in-kind benefit, the ability to drive a company car on personal errands (think commuting) is a taxable benefit. Business owners need to calculate the value of this benefit and include it as taxable income.
• Using a company car for primarily personal use. Think about it- if a construction company buys a Honda Odyssey as a business asset and it’s driven by the owner’s spouse, does that REALLY pass the smell test? Now imagine the vehicle is being driven home from baseball practice one night with 2-3 kids inside and suffers a bad accident. The business and its insurance rating are now liable for any potential claims. I’m not an insurance expert but I would think a court would rule a lot harsher on a business than a personal policy.
• Paperwork doesn’t match up. I’ve seen folks have the purchase paperwork and loan in their individual name but since the check for the 2-5K downpayment came out of the business, they try to claim it’s owned by the business. IF you are going to buy a company car, do it right. At least let the paperwork support the transaction, even if the Mustang you bought for your 16 year old son to “do deliveries for your floral shop” hasn’t ever seen a flower except for that one prom night.