If you are a business owner, it may be prudent to invest in a company car, but there are a few variables you’ll need to consider before making the jump. For example, who gets to drive the car? How will you handle paying the insurance premiums? How do you ensure the car is only being used for business purposes? You need to have answers to these questions and more when you are considering a business vehicle.
What To Consider Before Entrusting Employees
Here are some considerations you should make before you decide on entrusting your employees with a company car:
Buying or leasing?: Leasing might be a good option if you know the number of miles your employees will drive over the lease term. If they’ll be under the maximum number of miles and you don’t want to be committed to one car, leasing may be the option for you. Consider buying a used car as well. If you buy used, you can save and still get a dependable car brand. Whether you want to buy a used Mercedes Benz or invest in a used Toyota, it will affect everything from the total cost you pay to your insurance rates. While a new car might be tempting, you’ll be able to save a considerable amount of money if you go the used route. Just make sure you look for the “Certified Pre-Owned” designation if you decide to get a used car.
Insurance: For insurance purposes, all drivers of the car or cars must be noted. You’ll also have to establish what happens in worst-case-scenarios, such as if an employee’s personal possessions are stolen from the car.
Fuel/mileage: Who is going to cover them? The employee or the employer? Establish these guidelines at the outset so the employees using the car don’t get surprised with unexpected expenses.
Establish rules: You’ll need to establish all the requirements for maintaining the car, appropriate usage, and what happens if the employee is in an accident. Business owners planning to invest in large cars need to review the top heavy vehicle business rules.
Auto allowance: Typically, companies will give workers using an employer car an auto allowance. This covers the expenses related to driving the car. The allowance is given through what’s called an accountable plan, a set of rules your company sets up to account for money given to workers driving the car. This a way for the IRS to make sure the allowance is part of a legitimate business expenses.
Potential Business Expenses For Company Vehicles
One of the biggest benefits of acquiring and using a company vehicle is being able to write off expenses such as:
- Oil changes
- Tire purchases
- Car washes
- Vehicle depreciation
- Lease payments
This method of getting a tax deduction is the Actual Expenses Method. There’s also the Standard Mileage Method which the IRS changes each year. For 2019, the IRS set the standard mileage rate at 58 cents per mile and it will stay the same in 2020. So, if an employee drives 3,000 miles over the course of the year, the total tax deduction you would receive is $1740.
The Importance Of Keeping Accurate Records
Proof of expenditures related to business driving allow you to:
- Reimburse the employee for driving costs and avoiding needing to include that money in the employee’s salary or wages
- Show business use so you don’t have to reflect car’s value in employee wages
- Deduct depreciation expenses. Use a depreciation formula to maximize your deductions.
Final Considerations For Company Cars
If your business model necessitates the use of company cars, there are a lot of implications involved. Hire a financial advisor to help you navigate the specific IRS forms needed. You might also want to have a formal meeting about the rules regarding driving the company car with your employees. Setting up expectations in the beginning can help ward off problems later.
Adding a company vehicle to your business is a big decision, but if it can help grow your profits and make your employees happier, it’s a worthwhile expense. Stick to used cars, entrust the vehicle to responsible employees, and lay out rules and expectations. With these tips in mind, you’ll be ready to head into 2020 with a new company car and happy employees and customers.