As a business owner concerned with efficiency and growth, you look for ways to save money and manage your time efficiently. Excited that your business is expanding, you may decide to purchase a company vehicle. What may seem like a large purchase, may be an essential investment that can certainly pay off. Whether you own a service that caters food, delivers floral arrangements, or meets a specific need that relates to your industry, having a company car can certainly aid in expanding your business footprint.
But you have to ask yourself – how will this affect compensation? How will I be able to deduct and save the most money for my business?
In accordance to the IRS Employer’s Tax Guide for Fringe Benefits, YOU (the owner) are allowed to give your employees a vehicle to be used for work purposes, especially if the annual mileage is around 10,000 miles. Being able to trust and have a sense of transparency with your employees of what is considered business use may be difficult. It is important that your policy must be thoroughly explained before designating the vehicle.
The next question is what is a reasonable vehicle? The general rule is to look at what is considered reasonable. Depending on the circumstances, we may want to look at the fair market value, the industry, what a person would normally pay for a vehicle, or what would reasonably be leased for a company purpose. Obviously, it is pretty unlikely that one would use a two-seater Ferrari to deliver flowers!
When you provide an employee with a vehicle to be used for business, it’s good practice for your employee to keep a proper log of mileage purposes. While the IRS allows for incidental use by the employee, it is important for you to understand that if your employee uses the vehicle excessively for personal errands, you, as the owner, may lose out on using this vehicle for a tax break. Insist that your employees keep track of all business and incidental personal use, as this will help minimize difficulties in both your operations and your tax impact.
If you allow a company vehicle for commuting, the value of a vehicle will depend on the series of commutes your workers will make with it. Let’s say, for example, that your worker drives home and to work every weekday. Each one-way commute can be multiplied by a set amount, adding value in its use. If your team decides to share the ride and create some type of ride pool, that set value will increase for every passenger in that car.
There are other technicalities that include restrictions of who gets to use the company car. Some employees that meet a specific tax bracket or own stocks in your company are unable to receive these type of benefits. Therefore they are not allowed to use the vehicle.
We understand that when you’re a business owner, you completely feel the cost of doing business every day. You want to strive and nurture your business, but sometimes, it’s hard to figure out what the right moves will be to take your firm to the next step. MiklosCPA can help your small business make sense of all the rules and make them work for you. We’ve got it covered, so that you can charge on ahead! If you want to learn about how our services work, give us a call!