If driving to clients and job sites is an important part of your business, investing in a company car can be a smart solution. But owning or leasing a vehicle is different for businesses than it is for individuals, and it’s important to understand all the potential advantages and drawbacks.
To help you make the best decision for you and your team, ask yourself these seven questions:
1. How Would the Car Be Used?
A company car can offer liability and tax benefits – but remember that a vehicle owned by your business should be used for business purposes.
If you purchase or lease a car that appears unrelated to your line of work – like a luxury convertible for a landscaping service – that could look suspicious and be scrutinized in an audit. If you or your employees want the freedom to mix personal and business errands and travel, it might be best to drive your personal cars and keep track of mileage for reimbursement and tax reporting.
2. Should I Buy or Lease?
You might have seen our previous article on Buying vs. Leasing Assets – and many of these considerations come into play when it comes to company cars.
Durable goods like vehicles can serve your business for many years and are often good candidates for purchase. But if you think you’ll need the vehicle only for a limited period of time, a lease is likely the better option. Buying a preowned vehicle can offer savings, but if you need to drive the very latest model, a lease could be more cost-effective.
3. What Are the Tax Implications?
When you own a company car, you can generally claim tax deductions for most business-related expenses such as gas, tolls, insurance, maintenance, loan interest, and depreciation. Leasing can also provide tax benefits, because you can usually deduct the full amount of a lease payment during the year it’s paid.
However, if you provide a company car to an employee and they use it for personal purposes, those miles may be considered fringe benefit income that must be reported on their W-2. Consult your tax adviser to understand how a company car would impact your taxes and overall financial position.
4. Could a Car Boost My Brand?
One of the biggest benefits of a company car is that it can serve as a mobile billboard for your products or services.
If you purchase a vehicle, your options for branding are limitless. If it’s a lease, bear in mind that anything you do to the car will have to be completely reversible by the time you turn it in to the dealership. Even so, you may be able to promote your business with magnetic signs or other graphic elements that your employees might not want to put on their personal cars.
5. Do I Need a Fleet?
If you need only one or two company cars, a traditional auto dealership is usually the way to go. But if you need an entire fleet, you may get the best deal directly from a manufacturer.
The number of vehicles owned and operated by your company can also affect your taxes. If you have four or fewer, you can typically determine your deduction by multiplying those vehicles’ mileage by the standard mileage rate that the IRS sets each year. But if you have five or more, you’ll need to keep track of all your actual expenses.
6. What About Liability?
When it comes to liability and insurance, company cars have their pros and cons. A car owned by a legal business entity (like a corporation or an LLC) can limit your personal liability. And as a business, you may be able to get favorable auto insurance rates and terms, especially if you’ve covering multiple vehicles at once.
But be aware that if an employee is involved in an accident – even outside of business hours – your company could be held liable. Talk to your insurance agent to explore your options for commercial insurance.
7. What Do My Employees Want?
In the era of the Big Quit, business owners are eager to attract and retain top talent. A company car can be a major perk, especially for those who don’t have reliable transportation. And if you’re in an image-conscious industry, a nice set of wheels can help sales reps and other public-facing employees to shine up their personal brand.
But not every employee wants a company car. Many have chosen their own vehicles for specific reasons or don’t want the added responsibility of tracking personal miles. It pays to ask your current and prospective team members about their preferences.
Get the Greenlight
As you’re mapping out your next big move, consider Nu Direction. Your business can receive instant preliminary offers and loans up to $500,000 with funding in as little as one week.
Plus, if you’re looking for other types of financing, like auto loans, commercial mortgages, or SBA loans, we’ll be happy to connect you with one of our credit union partners. Learn more and get in touch today.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
Brought to you by Nu Direction Lending, a digital-first business lender that was formed and is funded by credit unions. To learn more about term loans for your business, visit nudirectionlending.com or contact us by email at email@example.com or by phone at 866-354-7151.
Nu Direction Lending is a digital-first business lender that was formed and is funded by credit unions. We combine the speed and convenience of online lenders with the personalized touch of the local credit unions who help fuel our local economies.