Small Business Tax Questions: Should Your Vehicle Be A Company Car?

October 29, 2011 by  Filed under: Taxes 

Do you own a small business and are about to purchase a new vehicle? Perhaps you are wondering, “Should I make this vehicle a company car and get some additional tax write-offs”? Read on to get the details.

Let’s further assume that your business is a single-owner limited liability company (LLC). By default, a single-member LLC is taxed as a sole proprietorship, unless you choose to be taxed as a C Corporation or an S Corporation by filing the appropriate paperwork with the IRS. I thought I should mention that because if you haven’t elected to be treated as a corporation for tax purposes, your LLC will be treated as a sole proprietorship.

Having said that, I’m not sure there is any tax benefit to making this vehicle “a company car.” Whether or not you put title to the car in the name of the LLC, you have the same options regarding how to deduct expenses for the vehicle. You can use the Mileage Rate Method or the Actual Expense Method, and either way, your vehicle expenses are deductible to the extent your car is used for business. If you use the Actual Expense Method, you would get a deduction for the actual expenses of operating the vehicle multiplied by the business use percentage (which is business miles divided into total miles). If you use the Mileage Rate Method, you multiply the number of business miles by the IRS mileage rate. As an LLC being taxed as a sole proprietor, you report the vehicle deduction on Schedule C, Line 9.

There really is no additional tax benefit to buying the car in the name of the business. In fact, from a paperwork standpoint, doing so could unnecessarily complicate things. You’ll have to make sure that vehicle ownership and registration paperwork is done in the name of the LLC. And if you finance the purchase, it is unlikely that the lender will put the loan in the name of the business. Most lenders want a small business owner to be personally liable for the debt.

One final comment: if you choose to use the Actual Expense Method and if the business use of the vehicle is 50% or less, you can only depreciate the vehicle using straight-line depreciation. You cannot take the Section 179 deduction or use one of the accelerated depreciation methods. Of course, it’s always wise to do an analysis of the Mileage Method vs. the Actual Expense Method, but when the business use percentage is that low, it may be that the Mileage Method results in a higher deduction.

Looking for more small business tax deductions? For a free copy of the Special Report “How to Instantly Double Your Small Business Tax Deductions” visit Wayne Davies is author of 3 ebooks on tax reduction strategies for small business owners and the self-employed.

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