Should You Get a Company Car for your Small Business?

If you’re a small business owner, you may have someone tell you that you should get a company car “for tax purposes.” But what does that mean exactly? Is having a company car really the “no-brainer” that some people make it out to be? Will it save you a ton of money on your taxes and also allow you to drive a nice, new car? 

Just like many things in life and in business, the answers to these questions are complicated. Unfortunately, there is no one-size-fits-all approach to company vehicles, since every business has different circumstances.

Here are a few things to consider before going out to your local new car dealership to purchase or lease your dream car through your business.

Buy, Lease, or Convert Your Personal Car to a Company Car?

Unlike most business purchases, buying a car is not considered a deduction that reduces your business’s net income. Instead, a car is considered what’s called a “capital expense,” and the purchase price is not deductible. This is because when you purchase a vehicle through your business, that vehicle is now an asset of the company, and assets are handled differently than deductible expenses in business bookkeeping. It also should be noted that your business can only purchase a vehicle if it’s a registered legal entity like an LLC or corporation. So, if you are a sole proprietor or part of a partnership, this isn’t an option for you.

If you are financing the car though your business, you can deduct the interest on the loan, but not the principal payments. You can also depreciate the value of the vehicle over time, which can give you an annual deduction. Both of these things will reduce your company’s net income, allowing you to pay less in taxes.

Here are 5 things to consider before purchasing a company vehicle, according to Businessing Magazine.

Another way to obtain a vehicle for business purposes is by leasing. When you lease a company car, the lease payments are considered deductible expenses, making this an attractive option for many business owners looking to reduce their net income for tax purposes. However, at the end of the lease term, you have to turn in the vehicle, and have nothing to show for all of the monthly payments you made—no cash from the sale of the vehicle and no trade-in.  

When you buy or lease a car through your business, it should be noted that commercial vehicle insurance may be required. Commercial insurance is often more expensive than personal insurance.

An option that many small business owners choose—especially sole proprietors—is to use their personal vehicle for business purposes, and then deducted the expenses related to the vehicle’s business use. There are two different ways to do this, and there are pros and cons to both methods. You can either deduct your mileage or your actual vehicle expenses. In this helpful eBook for small business owners who are considering company cars, the authors go into great detail about how each method is used and the benefits of both.

Before making any kind of decision about company vehicles, you should consult with your business accountant. He or she will be able to give you the best advice, based on your company’s unique circumstances and finances.