Buying a vehicle for business as a business.
March 19, 2006 8:38 AM Subscribe
Buying a vehicle for business as a business. Should I or shouldn't I?
I have a one-person consulting and service-oriented S-corporation. Up until recently I rarely had to actually travel to a client(s) office. Over the last year or so, it seems like my new clients need to have more real face-time. That’s not the problem.
The problem is that I end up having to use my personal vehicle to do the traveling. I don’t do much traveling for my private life, so about 70% of the miles I’m putting on my personal vehicle are actually business-related. I track all the miles and do the personal and business deductions at the end of the year. However, repairs and maintenance and insurance are being paid out of my personal funds, for what in essence is a business vehicle.
As the officer of the S-corp, I am considering having the business buy its own car. Partially because I don’t want to drive my personal vehicle into the ground, partially to keep everything separate, and partially to have the business take advantage of the repair, maintenance & insurance deductions.
Can anyone offer any benefits or pitfalls to this to help me decide if its feasible, possible...?
Bonus “trying to deal with government" question – I’m in PA and am having no luck finding info from PennDOT about how one would go about registering a vehicle to a business, or buying one as a business.
I have a one-person consulting and service-oriented S-corporation. Up until recently I rarely had to actually travel to a client(s) office. Over the last year or so, it seems like my new clients need to have more real face-time. That’s not the problem.
The problem is that I end up having to use my personal vehicle to do the traveling. I don’t do much traveling for my private life, so about 70% of the miles I’m putting on my personal vehicle are actually business-related. I track all the miles and do the personal and business deductions at the end of the year. However, repairs and maintenance and insurance are being paid out of my personal funds, for what in essence is a business vehicle.
As the officer of the S-corp, I am considering having the business buy its own car. Partially because I don’t want to drive my personal vehicle into the ground, partially to keep everything separate, and partially to have the business take advantage of the repair, maintenance & insurance deductions.
Can anyone offer any benefits or pitfalls to this to help me decide if its feasible, possible...?
Bonus “trying to deal with government" question – I’m in PA and am having no luck finding info from PennDOT about how one would go about registering a vehicle to a business, or buying one as a business.
i dont see how this would be a negative. its some kind of supreme tax dodge... every construction contractor around here seems to have a pickup truck that's about 10 times bigger than what they need, and come the weekend i see them all on the freeway towing boats out to a lake. i really doubt the weekend lake activity is business related.
posted by joeblough at 10:18 AM on March 19, 2006
posted by joeblough at 10:18 AM on March 19, 2006
It sounds as though you may be using the mileage reimbursement method for auto expense, but did you know there is another method where you can take all your expenses - including repairs, insurance, gas, etc - based on the amount that you use for work? So if you use your car for work 70% of the time, you should be able to take 70% of the cost of your total auto-related expenses. Here's an overview of the two deduction methods.
There may be other implications to business ownership, given your situation. I am a one-person consulting business too, but I am not set up as an "S" corporation. I had been using the mileage method because I had no car payment and it seemed easier. When I asked my tax consultant about buying a car, he suggested this method as being my best bet for deductions. He said that in his experience, people are vulnerable with car deductions when they try to claim 100% unless the car is exclusively business. Since mine is shared business/personal, he recommended this method.
By the way, if you used the mileage method in 2005, by the way, are you aware that the mileage rate had a one-time increase to 48.5 for the last 4 months of 2005? (In 2006, it is 44.5).
posted by madamjujujive at 10:32 AM on March 19, 2006 [1 favorite]
There may be other implications to business ownership, given your situation. I am a one-person consulting business too, but I am not set up as an "S" corporation. I had been using the mileage method because I had no car payment and it seemed easier. When I asked my tax consultant about buying a car, he suggested this method as being my best bet for deductions. He said that in his experience, people are vulnerable with car deductions when they try to claim 100% unless the car is exclusively business. Since mine is shared business/personal, he recommended this method.
By the way, if you used the mileage method in 2005, by the way, are you aware that the mileage rate had a one-time increase to 48.5 for the last 4 months of 2005? (In 2006, it is 44.5).
posted by madamjujujive at 10:32 AM on March 19, 2006 [1 favorite]
The standard IRS rate is 40.5 cents/mile (goes up every year), so if you drive the car 10,000 miles/year for business, that's $4,000 tax-free - not taxable to either you or the corporation. Are your gas and insurance and maintenance costs really so high?
Sure, if the business buys the car, you can essentially deduct everything. However, in that case, you should drive the car only for business - a bit of honesty which seems to be almost universally ignored, but nevertheless. You should also check on insurance costs for a business vehicle - I'd bet they are higher than for a personally-owned vehicle.
My guess is that the "savings" in this case comes not from any legal loophole, but rather the extra-legal savings of driving a business vehicle for personal use. If you wanted to achieve the same savings without changing the vehicle registration, you could simply report to the IRS that you drive your personal vehicle 99% for business use rather than the true 70% amount.
posted by jellicle at 10:36 AM on March 19, 2006
Sure, if the business buys the car, you can essentially deduct everything. However, in that case, you should drive the car only for business - a bit of honesty which seems to be almost universally ignored, but nevertheless. You should also check on insurance costs for a business vehicle - I'd bet they are higher than for a personally-owned vehicle.
My guess is that the "savings" in this case comes not from any legal loophole, but rather the extra-legal savings of driving a business vehicle for personal use. If you wanted to achieve the same savings without changing the vehicle registration, you could simply report to the IRS that you drive your personal vehicle 99% for business use rather than the true 70% amount.
posted by jellicle at 10:36 AM on March 19, 2006
You can certainly have your corporation buy a car, but first make sure that it is really to your advantage to do that.
For 2006 the standard mileage rate will be 44.5 cents per mile. It only costs you, maybe 10 cents a mile for gas. The other 34.5 cents is to compensate you for depreciation, insurance, maintenance and repairs. This formula is based on the average new car. Particularly if you have an older car, your depreciation and insurance are much lower. So the standard deduction is better than if you tried to itemize the actual expenses.
Second, if you really want to itemize your car expenses, you can do that right now without buying a new car through your corporation. You just keep the exact same records, total them up, then deduct the percentage of business use, in your case 70%.
You can even buy a new car for business use outside of your corporation and still take the same deductions, including a Section 179 deduction on the cost of the car in addition to depreciation.
If you buy the car through your corporation you have to be careful of any personal use. You would have to report any personal use of the business car as compensation on your W-2.
So you will have to work through the numbers first to decide if buying the new car through your corporation is worth the additional complications. Second, if you decide to buy a new car outside the corporation, you will probably find that it is to your advantage keep records and to deduct actual costs, including depreciation, insurance, repairs and maintenance. If you decide to stick with your older car, you will probably find that the standard mileage deduction works out best.
Keep in mind that you can switch from the mileage deduction method to the actual cost method, but you can't switch from the actual cost method to the mileage deduction method. The obvious reason for this is that the mileage method becomes more valuable as a vehicle ages.
posted by JackFlash at 10:36 AM on March 19, 2006
For 2006 the standard mileage rate will be 44.5 cents per mile. It only costs you, maybe 10 cents a mile for gas. The other 34.5 cents is to compensate you for depreciation, insurance, maintenance and repairs. This formula is based on the average new car. Particularly if you have an older car, your depreciation and insurance are much lower. So the standard deduction is better than if you tried to itemize the actual expenses.
Second, if you really want to itemize your car expenses, you can do that right now without buying a new car through your corporation. You just keep the exact same records, total them up, then deduct the percentage of business use, in your case 70%.
You can even buy a new car for business use outside of your corporation and still take the same deductions, including a Section 179 deduction on the cost of the car in addition to depreciation.
If you buy the car through your corporation you have to be careful of any personal use. You would have to report any personal use of the business car as compensation on your W-2.
So you will have to work through the numbers first to decide if buying the new car through your corporation is worth the additional complications. Second, if you decide to buy a new car outside the corporation, you will probably find that it is to your advantage keep records and to deduct actual costs, including depreciation, insurance, repairs and maintenance. If you decide to stick with your older car, you will probably find that the standard mileage deduction works out best.
Keep in mind that you can switch from the mileage deduction method to the actual cost method, but you can't switch from the actual cost method to the mileage deduction method. The obvious reason for this is that the mileage method becomes more valuable as a vehicle ages.
posted by JackFlash at 10:36 AM on March 19, 2006
Just to clarify my remarks, my tax consultant suggested the "itemized deduction" method as the best method for my new vehicle, and our usage sounds similar. He discouraged me from business ownership of the car since I do use my car for personal business. Because I am single and have no other household cars, he said this might be a red flag. If you have other cars in your household, you may be able to get away with a classifying your car as 100% business.
Oh, and if you are buying, don't forget there may be additional tax deductions for hybrids.
posted by madamjujujive at 10:56 AM on March 19, 2006
Oh, and if you are buying, don't forget there may be additional tax deductions for hybrids.
posted by madamjujujive at 10:56 AM on March 19, 2006
i really doubt the weekend lake activity is business related.
Sure it is. That's why they paint their business name and phone number on the side of the truck. When they're out there at the lake, they're advertising.
posted by ikkyu2 at 11:39 AM on March 19, 2006
Sure it is. That's why they paint their business name and phone number on the side of the truck. When they're out there at the lake, they're advertising.
posted by ikkyu2 at 11:39 AM on March 19, 2006
i really doubt the weekend lake activity is business related
There is nothing wrong with using a business vehicle for personal use. You just reduce your tax deduction by the percentage of non-business use. You must keep records of the mileage for each use.
And the IRS has explicitly stated that having a sign on a vehicle does not automatically make it business use. That advertising dodge does not work.
posted by JackFlash at 2:15 PM on March 19, 2006
There is nothing wrong with using a business vehicle for personal use. You just reduce your tax deduction by the percentage of non-business use. You must keep records of the mileage for each use.
And the IRS has explicitly stated that having a sign on a vehicle does not automatically make it business use. That advertising dodge does not work.
posted by JackFlash at 2:15 PM on March 19, 2006
given the state of enforcement at the IRS, i'm *real* sure all these bozos are reducing their tax deductions.
posted by joeblough at 7:45 PM on March 19, 2006
posted by joeblough at 7:45 PM on March 19, 2006
This thread is closed to new comments.
On the title, I just put the business name and business address like you would usually put your name and address, and it was not questioned at DMV.
I am in Minnesota. Title of the van is in my LLC's name (which I didn't even have to show proof of) and my LLC PO Box.
posted by thilmony at 9:19 AM on March 19, 2006