Should I Claim My Car as a Business Expense?
One of the most widely debated and misunderstood issues of tax law is how to handle the deduction of business vehicles for the business owner. To help sort through the maze of confusion, below you will find answers to many of the most confusing issues:
Buying vs. Leasing
"As an Atlanta CPA for decades, historically over the years every car purchased for everyday use has resulted in the same conclusion; a car is a bad investment. Though leasing does have its advantages, and I believe there are many scenarios when this option of financing is best, I generally lean toward buying a car vs. leasing. Like many others, I too have a romantic inclination towards cars and the appeal of both a new car look and a new car smell, however that doesn’t change the fact that cars are bad investments.
— Atlanta CPA, John Dillard CPA
The day you purchase a car, especially a new one, your large expenditure of monies are now worth much less than they were just moments before you drove off the lot. Given the nearly guaranteed rapid decline of value, paying cash for a newer vehicle is the best option. The purchase of a car outright should be your long-term goal. For many this will be an elusive achievement, for others who have reached their financial pinnacle, it will be possible. Buying a reliable car is the first requisite of purchasing a car and ensuring that the vehicle is well suited for your intended purpose whether it be an everyday passenger car or an RV.
The ultimate car buying experience of writing one check and walking off the lot is obtained in a series of many baby steps over an extended time period and consist of two important steps. First, always buy what you need and not what you want. This one guideline alone will save you thousands and many other financial hardships along the way as buying what you want will create even more thousands of dollars lost as your value rapidly falls. The second step is as you purchase vehicles over time that you continually put down more and more monies, financing even less each and every time until ultimately you are able to pay cash in full at a vehicles initial purchase.
Financing, whether you lease or purchase, adds additional carrying cost to an already poor investment. If you are in need of a new car then certainly you will want to take advantage of all resources available to you in verifying that the negotiated price is fair, obtaining the best financing available, and taking advantage of all dealer incentives and rebates available. However, you will never want to buy a vehicle solely based upon these criteria. Though you will be softening the negative financial aspects of purchasing a vehicle, buying a car remains one of the largest transactions whereby you can negatively impact your personal net worth.
Leases historically have been for new or newer cars and for those whose time is more important than their money. Though there are many in the world that meet this standard, I have found that I am not among them. A car falls more in value during the first few days than at any other time in the ownership period but the few months and years which follow run a close second. Though leasing generally will lower the monthly outgo temporarily as it requires a lessor to pay for the declining value of a vehicle and not the entire purchase, this advantage is soon lost as you lease car after car never being able to enjoy long periods of no payments. It is always best, especially if you usually buy and hold your car for longer periods – four years minimum and six years plus maximum – to limit your cash outlays over time.
Corporate vs. Personal Vehicles
Generally speaking I recommend that all clientele buy their vehicles personally and then turn in expense reports to get reimbursed for their business miles using the IRS’s statutory mileage rate. These rates are updated periodically. Primarily this is an advantage because it almost always results in a larger tax deduction than if the car were purchased and depreciated in the corporate name.
Many years ago tax laws were updated to dramatically limit and control the amount of depreciation a business owner could deduct by enacting the luxury car rules. These essentially limit the amount of depreciation one can record to being roughly the same whether you purchased a relatively modest vehicle or the most exclusive sports car made. Due to this limitation, I have found it generally more advisable to suggest that vehicles be owned personally.
This also has several other advantages being that your insurance rates are usually lower personally than corporately, and the amount of detailed receipts/records tax law requires you to have for a corporate vehicle is not an issue when you own your vehicle personally. Please be sure to note that whether you lease, buy, own corporately or personally that all vehicles should keep a day-by-day log to support the business miles claimed and personal miles utilized. I have found that the easiest place to track and record this information is on my business calendar.
Rules regarding the deduction of SUV’s/large vehicles continues to be in a constant state of flux, accordingly I suggest you discuss these specific issues and their application to your particular situation with your CPA.
We help business owners each and every month with determining whether you should lease or buy and whether to deduct actual vehicle expenses or mileage. We help you stay well apprised of tax law so that you legally maximize your valid deductions. Call us today so we can get started.