Best Way to Buy a Car in Business Name
Should you buy a car in the name of your business?
Or
Should you buy a car personally and get reimbursed by the mile from the business? (or try to get fancy and lease it back to your business)
The question I would ask is:
Do you need a car?
Because if the answer is no, then spending money on a new car for a “write off” is a joke.
You’re better off paying the tax and keeping the car you have.
A tax deduction, or a write off, is really just a discount applied on taxes paid.
If you’re in the 22% bracket and you buy a $65,000 car, you’re really paying $50,700.
Yes, you received a tax deduction…
But at the cost of $50,700!
Further:
If you’re looking to maximize the value of your enterprise for a future business sale, you’re going to have to show some profit (which means paying more in taxes).
So back to the question:
If you need a car and the answer is yes, perfect, we can move on.
Everyone’s favorite answer is, a business owned automobile.
Why?
Because the perception is you get the most deductions through owning it in the business.
Is it always the right answer?
No - but it can be.
If your business owns the automobile that means a few things:
The business must own the title of the car.
The insurance should be in the name of the business
You might be able to get around tilting the auto in the business name with joint tenants with rights of survivorship (JTWROS). This then opens the door for your auto policy to be in your personal name while still satisfying the IRS’s need for correctly titling the automobile (there’s also a liability risk here to consider).
Side note: if you buy the car personally then transfer it to your business, you might be on the hook for sales tax. Additionally, with a debt attached to the title, this may make changing ownership once decided a bit more challenging.
Depending on how high of an income year you’re having, purchasing a car may be a viable tax strategy with Section 179 and bonus depreciation.
Tax Cuts and Jobs Act (TCJA) made this more enticing as bonus depreciation allowed for 80% in 2023 (subsequently phasing out by 20% from 2023 onward, to be phased out by 2027) of the value of the qualified vehicle to be deprecated in the year you make the purchase.
Your vehicle has to qualify for Section 179 by:
Vehicles like shuttle vans that can seat more than nine passengers behind the driver’s seat
Classic cargo vans featuring a fully-enclosed driver’s compartment/cargo area, with no seating behind the driver’s seat
Over-the-road Tractor Trailers
“Singular use” business vehicles like ambulances or hearses
This is taken straight from section179.org.
If you don’t meet this standard, then your section 179 deduction is impacted by whether you take bonus depreciation or not.
For year 1 if you take bonus depreciation = $20,200
For year 1 if you do not take bonus depreciation = $12,200
This subsequently decreases for the next 3 years then levels off in the 4th year. More details on this HERE.
If your vehicle weighs more than 6,000 pounds then it’s not considered a luxury vehicle and not limited to the amount of depreciation taken (as determined by Section 280F).
If your vehicle remains under 6,000 pounds you’re limited on the depreciation you can take.
Long story short:
To maximize the vehicle depreciation, buy a vehicle over 6,000 pounds.
If you’re considering leasing or financing, the business portion of the lease amount is expensed but limited based on IRS Revenue Procedure 2016-23.
This usually isn’t favorable for vehicles costing over $70,000+ because post lease residual value of the vehicle dramatically falls and you’re limited on miles (ex: 10k/yr).
If your business owns the vehicle, you could use the standard mileage rate.
But note this is not allowed if:
Use 5+ cars at the same time
Claimed a depreciation deduction other than straight line, section 179 deduction, bonus depreciation
Claimed actual car expenses for a leased vehicle
Did not use the standard mileage deduction during the first year of use
Business mileage deduction is 0.65 cents per mile (note this includes deprecation built in).
Or:
If you personally own the automobile, you can get reimbursed by the mile (this could very well be the best option if you’re not going to benefit from Section 179 depreciation).
Thing to be careful of here is you’re going to want to keep expense reports in the form of mileage logs.
The easiest way to do this would be using an app on your phone to track the amount of miles that are used for each deduction.
This also comes with the following benefit:
You’re reducing the net income of your business (if you’re an S-Corp owner, this fringe benefit would also allow for a reduction in the amount of reasonable salary you must take → which means you’ll have more profit that isn’t subject to 15.3% Medicare and Social Security taxes).
If you’re fancy, you may think of the idea of leasing your vehicle back to your business - which is an option, but does present the challenge of estimating the vehicle costs and the miles driven.
The answer isn’t always straight forward regarding which option is best, but there are some guardrails to help frame how to make the decision.
If you churn vehicles over every 2-3 years that cost $85,000+, then this is a good scenario for a business owned vehicle.
In the event you drive a car until the wheels fall off, then it’s more clear this should be individually owned and reimbursed.
In the middle, is where things get a little more complex, is subject to the math, your and your accountant's thoughts, weight of the vehicle, miles driven, how long you own the vehicle, and vehicle cost.
Couple things to remember:
If you don’t need a car, paying tax isn’t the worst option in the world.
Vehicle deductions within a business are frequently shot down by the IRS during audit. If you’re solely of buying a vehicle as a way to reduce your taxes, think again.