Questions to Answer Before You Get a New Vehicle for Your Business
Personal taste and your pocketbook are usually the deciding factors when choosing a new vehicle. If you're in the market for a new car, light truck, or van that you plan to use at least in part for business, you'll want to make certain decisions before you shop to help you make an informed decision. The answer to these questions can affect the type of vehicle you select, your cost, and your tax write-offs.
Should you get a new or pre-owned vehicle?
Buying a used vehicle can save you money. Look for warranties that will provide coverage if something mechanical goes wrong. Check for gas mileage efficiency (older models may be have a lower MPG rating than new ones), which will impact your operating costs.
From a tax perspective, whether the vehicle is new or pre-owned does not affect your write-offs. If you buy rather than lease the vehicle for business, you can depreciate the cost, but dollar limits usually apply. For vehicles purchased last year, there had been a higher dollar limit applicable to new vehicles because of bonus depreciation; since there is no bonus depreciation this year, there is a single set of dollar limits for both new and pre-owned vehicles purchased in 2010.
Last year, if you bought a new vehicle for personal use from February 17, 2009, through December 31, 2009, you may have been able to deduct the sales tax on the purchase; this tax break does not apply in 2010 (unless Congress extends it).
Should you buy or lease the vehicle?
Leasing a vehicle may enable you to drive a more expensive one than you could if you purchased it. However, as a practical matter, you must consider the type of driving you do to determine whether leasing is really an option for you. For example, if you expect to drive more than 15,000 miles a year, leasing may not be a good choice because of cost — most leases limit annual mileage to no more than 15,000, with excess mileage charged at a pricey rate.
Taxwise, it may or may make not make any difference whether you own or lease the vehicle. You have two options for write-offs:
- Deduct actual expenses. In this case, you'd deduct depreciation (within set limits) if you own the vehicle, or lease payments if you lease it. Lease payments could provide a larger write-off in some situations; it depends on the type of vehicle you lease or buy. Deductions for other costs, such as insurance, gasoline and repairs, would be the same whether you own or lease.
- Deduct an IRS-set standard mileage rate. In this case, the annual deduction is based on miles driven and not the cost of the vehicle, whether you buy or lease, or any other factors. The standard mileage rate takes into account any depreciation or lease payments, as well as other costs of operating the vehicle. The standard mileage rate for business driving in 2010 is 50¢ per mile. (There is no write-off for personal driving, which usually includes commuting to and from work.)
Should you or the business own the vehicle?
Whether you put the vehicle in your own name or in the name of your company depends on a variety of factors:
- Insurance. Coverage for business-owned vehicles is usually more expensive than personal coverage. However, if the business has several vehicles, there can be a "fleet" discount.
- Liability exposure. If the vehicle is involved in a lawsuit, it's better to have your corporation own the vehicle so that you have no personal liability exposure.
- Tax savings. Corporate ownership of a vehicle can mean greater deductions. The corporation can write off 100% of the costs related to the vehicle (subject to depreciation limits discussed earlier). If you own the vehicle, you can only write-off business-related costs and, as a shareholder-employee, can only deduct these costs as a miscellaneous itemized deduction (only amounts in excess of 2% of your adjusted gross income are deductible).
Should you buy an alternative energy vehicle?
If you want to help the environment and save on fuel costs, there is a number of alternative energy vehicles that you can choose to drive. There are special tax incentives for doing so, whether you buy the vehicle for business or personal driving:
- Hybrid vehicles may allow you to take a tax credit. The credit varies with the manufacturer and model number. Some hybrids, including those made by Toyota and Honda, no longer qualify for any credit.
- Electric vehicles may also give you a tax credit of up to $7,500. You can find a list of qualified vehicles here.
There may also be state tax incentives for alternative vehicles, such as breaks on sales tax or tax credits. To find state tax breaks, go to the Database for State Incentives for Renewables & Efficiency.
In the final analysis, personal preferences and your pocketbook may be the deciding factors in your selection of a vehicle. However, the answers to the questions posed above could help you determine certain things, such as whether to buy or lease. It's a good idea to talk over your concerns with your tax advisor and run the numbers to see what choices are best for your situation.
Find tax information about deducting vehicle expenses in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.