11 Mar How Should I Buy a Car as a Business Owner?
Recently, we were asked the following questions by a small business owner: “What is the best approach to buying a car? Should I use my personal money or the business account? What are the tax implications?” So, we thought it would be helpful to provide some answers should you have the same questions today or in the future.
Purchase with personal or business funds?
The best way for a business owner to purchase a vehicle depends on the percentage of business-use miles versus personal miles driven each year. If the vehicle is used more than 50 percent of the time for business purposes, it’s best to use business funds to purchase the vehicle. Using the car more than 50 percent of the time for business use allows business owners the option of accelerated depreciation, which can mean larger tax deductions.
Two Options for Deducting Expenses
There are two options that can be used to deduct automobile expenses. The first is Actual Cost. In this method, automobile costs—such as the cost of the vehicle, repairs and maintenance, fuel, insurance, and personal property taxes—are deductible based on the percentage of business miles driven. For instance, if a business owner drives a vehicle 10,000 miles during the year and 5,000 of those miles are for business purposes, the business use percentage is 50 percent, and 50 percent of these Actual Costs are deductible for tax purposes.
The second option is the Standard Mileage Rate, which is also based on business miles driven. The IRS provides the standard mileage rate each year. For 2018 the standard mileage rate was 54.5 cents per mile, but will increase to 58.0 cents in 2019. Using the example of 5,000 business-use miles, the Standard Mileage Rate deduction would be 5,000 X .545, or $2,725. An advantage of this method is that it requires less record keeping than the Actual Cost method.
Which option to choose?
Several factors affect which method best fits each business need. The smartest way to determine which method to use is to calculate the differences between the two. In general, it’s best for business owners to take the Standard Mileage Rate if they drive a lot of miles each year, but this may not be true for those who own older vehicles that require more maintenance. Also, business owners who purchase new vehicles every year or two should consider using Actual Cost, because the deductible depreciation of these vehicles—along with regular maintenance and other costs—may be greater than the Standard Mileage Rate.
Important Points to Consider
Those who use the Standard Mileage Rate must select this option the first year the vehicle is used for business purposes, but they can switch to Actual Cost after the first year. Because of the increased deduction they’ll realize because of depreciation, those who choose the Actual Cost option the first year the vehicle is used for business purposes must use this method for the life of that particular vehicle.
What about Vehicles over 6,000 pounds?
The IRS has a different set of rules for vehicles like vans, trucks and some large SUVs that weigh over 6,000 pounds. For instance, these vehicles are eligible for bonus (or larger) depreciation deductions, meaning that Actual Cost may be the best route. However, because there are many considerations, business owners who purchase vehicles over 6,000 pounds—particularly those who purchase fleets—should visit with an accountant to weigh the pros and cons of Actual Cost versus the Standard Mileage Rate.
We hope that these clarifications will be useful the next time you’re looking to buy a car!
Big thank you to Two Roads Team Member and CPA, Erica Harrod, for providing her expertise and research for this post.