One of the most common questions business owners have is whether they should have their company acquire a vehicle. While it can offer significant benefits, it also introduces complexities, particularly concerning taxes and compliance.
This article provides a high-level overview to help you understand the key factors involved in this important decision.
The Primary Benefit: Deducting Actual Expenses
When a business controls a vehicle (whether owned or leased), it can deduct the actual costs of operating that vehicle for business purposes. These deductible expenses include:
- Fuel
- Insurance
- Repairs and maintenance
- Tires
- Registration fees and taxes
- Loan interest (if financed) or lease payments, subject to limitation (if leased)
- Depreciation
For vehicles used heavily for business, deducting these actual expenses can often result in a larger tax deduction than the alternative mileage reimbursement method.
The Alternative: The Standard Mileage Rate
The simpler alternative is to own the vehicle personally and have the company reimburse you for business miles driven.
- How it works: You track your business mileage and multiply it by the standard mileage rate set annually by the IRS (e.g., 67 cents per mile for 2024). This reimbursement is a deductible expense for the company and is not considered taxable income to you.
- Simplicity: This method requires less-detailed record-keeping—you only need to log your business miles, not every single expense receipt.
The Major Hurdle: Tracking Personal Use
The most crucial compliance issue is tracking personal use. The IRS is very strict in this regard.
- Personal use is a taxable fringe benefit. Any driving that is not for business—such as commuting, running personal errands, or weekend trips—must be tracked and included in the employee’s (often the owner’s) gross income.
- Calculating the value: The value of this personal use is typically calculated using the IRS’s “Annual Lease Value” table. This amount is then added to the employee’s W-2 wages and is subject to payroll taxes.
Mandatory Record-Keeping
To substantiate your business use and correctly calculate personal use, meticulous records are not optional. You must maintain a contemporaneous mileage log that includes:
- The date of each trip
- Your starting point and destination
- The business purpose of the trip
- The total mileage for the trip
Failure to keep adequate records can result in the IRS disallowing your vehicle deductions entirely.
Owning vs. Leasing the Corporate Vehicle
Once you decide to use a company vehicle, the next question is whether to buy or lease. Each has distinct advantages and risks.
Owning (Purchasing)
When the company buys the vehicle, it holds the title.
- Benefits:
- Equity: The company owns an asset. Once the loan is paid off, the vehicle is owned free and clear and can be sold.
- No Mileage Limits: You can drive as much as needed for business without facing penalties for high mileage.
- Depreciation Deductions: The corporation can claim a depreciation deduction each year, subject to IRS limits.
- Risks:
- Higher Cash Outlay: Loan payments are typically higher than lease payments, and a down payment is often required.
- Depreciation Risk: The company bears the full risk of the vehicle’s decline in value. You may get less than expected when you eventually sell it.
- Maintenance Costs: As the vehicle ages and falls out of warranty, the company is responsible for all repair costs.
A Note on Bonus Depreciation and Recent Tax Changes
A major incentive for purchasing a business vehicle has been bonus depreciation. This powerful tax tool allows a business to immediately deduct a large percentage of a vehicle’s cost in the first year.
Under the Tax Cuts and Jobs Act (TCJA) bonus depreciation began phasing out the amount of bonus depreciation available, with 60% available for vehicles placed in service in 2024 and completely phased out for vehicles placed in service past 2026. With the signing of the One Big Beautiful Bill Act (OBBBA), 100% bonus depreciation has been permanently restored for vehicles placed in service after January 19, 2025.
This full expensing capability can provide a substantial tax benefit for businesses that invest in vehicles for their operations. However, it’s important to note that certain limitations still apply, particularly for vehicles classified as “luxury automobiles.”
Key Provisions and Limitations:
- 100% Bonus Depreciation: For qualified vehicles acquired after January 19, 2025, businesses can generally deduct 100% of the cost in the first year.
- “Luxury Auto” Caps: The Internal Revenue Code (IRC) places limits on the amount of depreciation that can be claimed for certain passenger vehicles. While the OBBBA restores 100% bonus depreciation, these caps will still apply and may limit the total first-year deduction for more expensive vehicles. The specific depreciation limits are adjusted annually for inflation.
- Section 179 Expensing: Businesses also have the option to expense the cost of qualifying vehicles under Section 179 of the IRC. The OBBBA also reportedly includes changes to Section 179, and businesses should consult with a tax professional to determine which method, or combination of methods, provides the greatest tax advantage.
- Vehicle Type Matters: The depreciation limits vary depending on the type and weight of the vehicle. Heavy SUVs, trucks, and vans are often subject to different rules than smaller passenger cars.
Leasing
When the company leases, it’s essentially a long-term rental.
- Benefits:
- Lower Monthly Payments: Leases often have lower monthly payments and smaller upfront costs, which can improve business cash flow.
- Newer Vehicle, Fewer Hassles: You can drive a new vehicle every few years, often keeping it under the manufacturer’s warranty. At the end of the term, you simply return it without the need to sell.
- Predictable Costs: Monthly payments are fixed, and major repair costs are often covered by the warranty.
- Risks:
- No Ownership: You build no equity. At the end of the lease, you have nothing to show for your payments.
- Mileage and Wear Penalties: Leases have strict annual mileage caps. Exceeding them results in expensive per-mile penalties. You will also be charged for any “excessive” wear and tear.
- Lease Inclusion Amount: To level the playing field with owning, the IRS requires you to reduce your lease payment deduction for higher-value vehicles. This is known as an “income inclusion amount.”
Which Path is Right for You?
The decision to buy, lease, or use a personal vehicle depends entirely on your specific circumstances, including your cash flow, expected mileage, and tolerance for record-keeping.
Next Steps
The decision to acquire a corporate vehicle has lasting financial and administrative consequences. We can help you analyze your specific situation, project the potential tax outcomes of each method, and make an informed choice that best suits your business goals.