Company vehicles and tax deductions
As 2015 comes to a close, many business owners are seeing a large degree of growth and profitability over the past year. Unfortunately, without some careful planning before the end of the year, that strong bottom line could result in a larger-than-expected tax bill.
One way to reduce the tax burden is through the purchase of capital assets. Your business might be in need of new machinery, equipment or computers. Through IRC Section 179, the cost of most of these capital expenditures can be deducted in the year the assets are placed in service, subject to certain limitations. For 2015, the maximum expense allowed under IRC Section 179 is still $25,000, but we are hopeful that Congress will increase that limitation back to $500,000 as it has been over the past several years.
What about vehicles?
There are unfavorable depreciation rules and limitations that apply to the purchase of some vehicles. For most passenger autos, first year depreciation is limited to $3,160. For light trucks and vans, first year depreciation is limited to $3,460. If business use of the vehicle is less than 100 percent, the deduction is further limited to the percentage used by the business. Those deductions aren’t much help in knocking down tax liability.
There are exceptions to these unfavorable rules for certain vehicles. Purchasing a qualified truck or van will increase the allowed depreciation deduction substantially. The trick is to purchase a vehicle that is not a “passenger auto.” A non-passenger auto is a truck or a van with a Gross Vehicle Weight (GVWR) greater than 6,000 pounds. The list of qualified “heavy” vehicles is quite long and includes several mid-sized SUV’s that might be better suited for those companies that don’t necessarily need large trucks.
Under current law, purchasing a $50,000 heavy vehicle will give a first year depreciation deduction of $30,000, assuming that the full Section 179 deduction is available to be used and that the vehicle is used 100 percent for business purposes. If Congress extends the 50 percent bonus depreciation allowance, first year depreciation on a $50,000 vehicle would increase to $40,000.
Personal use of company vehicle
Providing a company vehicle to employees can be beneficial to both the employer and the employee. However, if the employee uses the vehicle for personal use (including commuting to and from work), the fair market value of the personal use needs to be included as compensation to the employee.
Vehicles are considered “listed property” and are subject to more strict substantiation rules than non-listed property in order to prove business use. Employees using a business vehicle are required to keep a written record of use. The record should include the date, mileage, destination and business reason for each trip. Keeping this level of detail prevents the IRS from disqualifying the business deductions for qualified business use. If records are not properly maintained, the use of a company-provided vehicle is deemed to all be personal use and included in compensation.