Pretty much every business needs a vehicle. Some use automobiles to visit customers, customers, vendors, or run business chores–to the lender, to see a lawyer or other business advisor, or to scope out new business. Others use sockets to take tools of the trade to worksites. And still, others utilize cars or trucks to make deliveries or tote equipment. No matter the purpose, company practicalities and tax rules affect purchasing and leasing company vehicles in 2020.
Buy or Lease Company Vehicle in 2020?
The perennial question that many small business owners ask when thinking of a new vehicle is whether to buy or lease. As a guideline, leasing enables owners to get more expensive vehicles than what they can afford if they’d have to purchase them.
From a tax perspective, in claiming a deduction for company driving, the same standard mileage rate (e.g., 57.5 cents per mile in 2020) applies whether the vehicle is owned or leased. Those who deduct the actual cost of business driving need to figure that choice –purchase or rent –produces the higher write-offs. When a car bought in 2020 is a”luxury vehicle” (just costing over $90,000), special dollar limits cap the amount of depreciation that might be claimed. These limits can be adjusted yearly;
But, heavy SUVs are not subject to these dollar limits. There’s a distinctive first-year expensing limitation ($50,900 in 2020). And due to a special allowance known as bonus depreciation, the entire cost of such a vehicle can effectively be composed in 2020.
Leasing a car valued at greater than $50,000 requires the deduction for rental payments to be decreased by a so-called”inclusion amount,” but such sum is quite modest.
Taxes aside, as a practical matter, leasing may be out of the question should you expect to do a great deal of driving. Most rentals make it too expensive if annual mileage exceeds 15,000 or so (of course, based on the terms of a particular lease).
Which vehicle to get?
Assess the driving for which the vehicle is going to be used. Factor in the cost of fuel (quite low today but could increase in the future), insurance, and other operating costs to budget appropriately.
Consider that you might be entitled to a tax credit if you purchase a plug-in electric drive automobile. The credit for a 4-wheel vehicle is up to $7,500. However, credits may be reduced. The IRS has a listing of qualified vehicles and their credit limits. (There is a credit to get a 2-wheel electric vehicle, which expires at the end of 2020 unless extended.)
Be aware that no credit may be claimed when the producer sells over 200,000 vehicles, a benchmark passed by both Tesla and GM.
Things to do when employees use company vehicles?
If you let workers drive company vehicles, contemplate restrictions on private use to accommodate your insurance policy. Additionally, think about the way to deal with the tax implications of any personal driving. Allowing employees to use company vehicles after hours triggers a taxable fringe benefit (there are limited exceptions).
Figuring how much an employee would have to pay a third party to lease the same or similar car. This determination must factor in comparable terms and the geographical site. You might find this evaluation rule hard to use because it’s so details specific.
Multiply the number of miles driven for personal use by the yearly IRS-set standard mileage rate (57.5cents per mile in 2020). While this option is simple to figure, it may only be used if various conditions are satisfied. By way of example, the vehicle’s value when initially made accessible to the worker doesn’t exceed a set amount ($50,400 in 2020).
Commuting rule. Multiply the number of one-way trips for which the vehicle is utilized by the worker by $1.50 if you require the employee to commute in the vehicle under a written policy and the employee is a”control employee” (e.g., owner or one who’s highly compensated ).
What to do when employees use personal vehicles for company business?
Companies may not have to buy or rent vehicles if workers use their own cars, vans, or trucks for company driving. Before, workers who itemized deductions were able to write off their business driving as a miscellaneous itemized deduction, but this option is frozen for 2018 through 2025.
Companies can help employees cover their company driving prices in a tax-advantaged manner that benefits both employees and the companies. It is not even reported on their Form W-2. The employer can deduct the reimbursements as company expenses and they aren’t subject to employment taxes.
Before taking any action, review your choices with your CPA or other advisors to ascertain the best way to go.