Having a company car can be a double-edged sword. This is true for both employees as well as employers. Although the rise of the average American car price has been pretty slow, there’s still been a notable and steady increase over the years. For this reason, many workers consider vehicle privileges as a significant advantage in terms of picking which jobs to apply for.
Employees considering whether or not they should accept company cars should first note that the IRS considers company-owned vehicles as a fringe benefit. This means that the procurement and maintenance of such a vehicle would be taxed as an employee benefit that’s generally part of their gross income. In short, you and your employer may be able to deduct specific car-related expenses come tax season.
At the same time, only business-related use of the vehicle and other such expenses can be written off during taxation. Furthermore, if you’re using a company car, you will have to actively keep receipts and record those instances and expenses in order for them to be tax-deductible. For employees, accepting a company car is generally advantageous, as its depreciation and maintenance will generally be shouldered by the company. Some companies may even offer financing terms for employees to eventually own their company vehicles. As long as you report all personal and business use and clear all terms with your HR department, you’re unlikely to run into any major problems.
For Business Owners
For business owners, the advantages and disadvantages of owning a company car can be more complex. However, this can be simplified by focusing on two key factors: taxation and liability. These factors differ between limited liability companies (LLCs), corporations, partnerships, and sole proprietors.
An S corporation for instance is considered as a totally separate legal entity from its owners and shareholders. This means that while your personal assets are protected from business lawsuits, vehicles under your ownership can be legally seized to pay for any business debts or liabilities. At the same time, corporations are ‘double-taxed’ through the state and personal income. And this extra tax burden can be reduced by deducting car-related losses and expenses such as depreciation over time, vehicle maintenance costs, and insurance payments during tax season.
Meanwhile, an LLC business can choose to do the same, but also has the option of being taxed as a sole proprietorship. This means that the business and the lone LLC owner/member is considered as a single legal entity – but mostly for taxation purposes. Under an LLC’s limited liability stipulations, a company car could still be seized in the event of business lawsuits. However, the aforementioned tax deductions would be through the owner’s personal income, avoiding the double-taxation of corporations, and potentially extending the overall value of company vehicle ownership.
Another important thing to note is how these deductions are only considered in terms of operating expenses. So whether you’re a corporation, LLC, partnership, or sole proprietor, you need to have approved ways of recording business-related vehicle usage. There’s also the matter of being liable for any untoward incidents or accidents related to the vehicle, especially if the cause can be traced back to its maintenance or poor employee safety training. These are just some of the factors you need to discuss with your accountant and business attorney in terms of weighing the pros and cons of financing a company car.
In short, the usefulness and overall value of any company car will largely depend on your personal, work-related, and financial circumstances. Whether you’re an employee who’s considering accepting a company car, or an employer looking to own a fleet of vehicles for business, these are the key pros and cons you should consider.