In this situation, we’ll look at ownership by a corporation vs. ownership by an employee.
Acceptable Business Expenses for Use of Car/Truck
First, remember that whether the business or the employee owns the car, only actual business use of the car is deductible as a business expense. Commuting expenses between home and business are not deductible and personal travel is not deductible.
Taxes and Business Vehicles
Probably the biggest benefit to either the company or the employee from owning a business car is the cost savings from tax deductions. This deduction comes in two parts: For the owner, the cost of the vehicle as a business asset and the costs for use of the car are both fully deductible from business taxes. For the employee, the cost of the car as an asset is not deductible—nor is the interest expenses of the car loan. Employees can no longer deduct unreimbursed business expenses.
Benefits of Business Ownership of the Vehicle
The company can deduct depreciation expenses at the rate in effect at the time the asset is put into service (begins to be used). The company can also deduct general auto expenses for business use of the vehicle, like maintenance, gasoline, and tires. Also, interest on a car loan is deductible (the percentage of business use only) to a business as an ordinary and necessary business expense. If the business owns the car, personal use of the car must be documented. The company must report personal use by an employee—as an example, they drive the car to and from work—as taxable compensation on the employee’s W-2. Insurance for a company-owned car may be cheaper than for an employee-owned vehicle since businesses can get leased-car and multiple-car rates and other discounts. If a company-owned car is involved in an accident, the driver’s personal insurance rates and liability are minimized, especially when drive other car insurance is added for the employee.
Employee Ownership of the Vehicle
The major benefit of employee ownership of a vehicle for business driving has been eliminated by the 2017 Tax Cuts and Jobs Act (TCJA), beginning in 2018 continuing through 2025. As noted above employees can no longer take a deduction on Schedule A for unreimbursed business expenses, including business driving expenses. Also, the employee may need to get a separate auto insurance policy to cover the commercial use of the vehicle. While any personal coverage the employee has may cover some damage, it is unlikely to cover the car if its primary function is for business activities. As an example, imagine a plumbing company that has a business truck used for making calls. If the owner should drive the truck to the store and have an accident, the damage may not be covered because it was not in business use at the time.
Leasing vs. Buying a Car for Business Use
The same factors may apply if a business decides to lease a car for employee business use. If you lease a car for an employee, you don’t have much control over how much mileage the employee puts on that car. Many car lease terms have mileage restrictions. If you (as the owner) drives a leased car, you may be able to control personal use and keep costs down. Every situation is different, but consider leased cars as perks for owners and executives, and buy cars if employees will be driving them.
