As a small business owner, handing over your personal car keys to employees may be seamless—but only at the early stages of a business. Sooner or later, you'll need to switch to a commercial car to meet the growing needs of your company. After all, your sedan can't handle everything you throw at it.
For example, if your landscaping business would be better off switching from portable lawnmowers to commercial-grade machinery, you'll need to invest in a dedicated van or truck to carry that equipment to the job site.
But how should you go about investing in a car? Is it better to buy a car for your business or get another personal vehicle? Should you lease or buy a car?
We'll answer all that and more, so let's dive in.
Is It Worth Buying a Car for Your Business?
It's worth buying a car for your business if you frequently need a vehicle for business activities—like transporting equipment or delivering goods.
In fact, you can write off some of your car expenses to lower your tax bill, which is a win-win scenario for any small business owner.
That said, if your business is relatively small, you can also go without buying a commercial car.
For example, if you operate a small residential landscaping business whose clients are within a 20-mile radius, you can continue using a personal car if your equipment is compact and portable.
Should You Lease or Buy a Car?
The decision between leasing and buying a car for business depends on how free your cash flow is. If you can take some cash out of the business without compromising its growth, it's better to buy a vehicle because you can use it whichever way you like and visually brand it as your company car.
But if you're short on capital, you may be better off leasing a car since buying one requires a significant upfront investment.
Now that we've answered your burning questions let's look at the finer details.
Who Should Buy a Car for their Business?
Buying a car for business is worth it for many small business owners if the car will see frequent use. Examples include:
- Contractors: Plumbers, painters, electricians, roofers, and carpenters often need to transport tools, equipment, and material to job sites, so it's useful to have a company truck or van when growing or starting as a contractor.
- Food services: You may need a truck or a van to run or start running a catering business or mobile restaurant since you'll need to transport large amounts of food and equipment to event venues.
- Delivery services: If you offer local delivery as a part of your business, you could use a dedicated business vehicle, especially if you own a restaurant or retail store.
That said, weigh the pros and cons of a commercial car before taking the plunge.
Pros and Cons of Buying a Car for Business
A business vehicle has its perks and drawbacks. On one hand, you can save on taxes and customize your vehicle. On the other hand, you have to bear higher maintenance costs and additional insurance expenses.
Let's see what buying a car for your business gets you.
Since you pay for a company car to improve your business operations, it's a legitimate business expense that lowers your taxable income.
Typically, that means writing off car-related payments as business expenses. This includes depreciation expenses, fuel costs, maintenance costs, interest payments, and insurance fees.
That said, tax regulations are as clear as mud on a rainy day, so we'll explain how it all works later in this guide.
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If you regularly use a vehicle for business, buying a car could help you reduce operating expenses. You won't need to pay for another service to deliver your goods, haul your equipment, or shuttle your employees. Instead, you'll rely on your business vehicle for all those activities.
A rented or leased vehicle leaves little room for customization. You can't apply your branding or modify the vehicle according to your specific business needs. In contrast, if you own a car for your business, you can make it your own by making modifications.
For example, a landscaping business owner might consider installing racks, bins, and shelving units inside the vehicle to organize equipment and supplies.
While a company vehicle offers several advantages, it does come with added challenges.
Higher Capital Costs
Purchasing a car usually requires a hefty initial investment—whether you opt for a cash purchase or decide to take out an auto loan.
If you don't have spare cash, you may end up disrupting your normal course of business operations to free up some of your budget. If that rings true for your business, renting or leasing a business vehicle might be a safer choice.
Significant Monthly Payments
Regardless of whether you go with a lease or auto loan, you'll have to deal with monthly payments. Loan repayments typically cost more than a lease, but on the bright side, you'll have ownership of the vehicle.
Don't forget to factor the cost of insurance into your estimates. If you end up purchasing a vehicle, you may have to sign up for a commercial auto insurance package—something that may be handled for you if you go with a lease provider.
Increased Maintenance Costs
Since your business owns the car, you'll have to deal with all the maintenance costs, including routine oil changes, major repairs, and part replacement. There won't be a leasing company to call if you start hearing grinding noises under the hood.
In short, buying a car for business will increase your operating costs significantly.
How To Buy a Car for Your Business
Once you've decided to take the leap of faith, all that's left to do is decide how to purchase a company vehicle.
Step 1. Assess Your Business Needs
Before you head off to the nearest car dealer, consider what your business requires to get the best return on your investment.
A couple of requirements worth looking into include:
- Purpose of the vehicle: What are you planning to use the car for? Transporting raw materials for a construction project would require a different vehicle than giving a ride to your catering staff.
- Expected mileage: How much weekly travel are you expecting? If you own a plumbing business that serves clients all over the city, prioritize a fuel-efficient vehicle to keep gas costs to a minimum.
- Size of the crew: How many employees will be using the vehicle? You may need a commercial car with more seating capacity if you have a larger crew.
Step 2. Select the Type of Vehicle
Decide on a vehicle that feels just right for your business, given your requirements and budget.
For example, if you're an electrician, you may be better off with a van. In contrast, your landscaping business might require a truck.
Here are a couple of recommendations for different small businesses:
- Landscaping businesses: Use a utility van to carry tools and supplies. Alternatively, use a pickup truck to transport larger cargo and equipment.
- Construction workers and contractors: Pickup trucks or cargo vans are perfect for transporting tools and materials to construction sites.
- Event organizers: SUVs and minivans provide seating for staff and room for event materials.
Step 3. Agree on Used or New
Consider whether you should opt for a used or new vehicle.
Expect price differences when comparing insurance for used versus new cars. In general, insurance for new vehicles is pricier.
In contrast, used cars often have higher maintenance costs due to general wear and tear and a lack of maintenance history.
But that's not all. You might also want to choose a newer model if you're looking for:
- Fuel savings: If your business involves long-distance transportation, you may need a newer vehicle with better fuel economy.
- Tax benefits: By opting for an electric vehicle, you could save on things like sales and registration tax due to government incentives.
- Warranty coverage: A new business car typically comes with a warranty from the manufacturer, which covers certain maintenance and repair costs for a limited time.
Step 4. Consider Financing Options
Once you have the exact model you want in mind, it's time to loosen your grip on your piggy bank.
You have three possible financing options when buying a business car:
- Upfront payment: You can purchase the vehicle by paying a lump sum amount. You avoid the added cost of interest but will have to put down a significant amount of capital. However, you'll save money in the long run, especially if interest rates are high on potential loans.
- Business loan: You can take out a commercial car loan from a lender and buy the vehicle with a down payment plus monthly loan payments. This option comes with interest payments down the road. But your cash flow won't be impacted as much, and you'll still own the car. Plus, you can record the interest as business expenses to get tax deductions.
- Leasing: Instead of buying the vehicle, you can lease the vehicle by paying the dealership a monthly lease payment, which can be desirable as it requires the least commitment. However, a lease won't increase business equity and leaves little room for branding and customization.
Step 5. Buy the Chosen Vehicle
It's time to pay the car dealer and call the ride yours. To start off on the right foot, pay with a business bank account or business credit card.
With a business account, you separate your personal finances from business cash flows. You'll appreciate this clarity when tax season comes around, or the tax collector comes knocking for an audit.
Step 6. Get Car Insurance
To get your vehicle ready for the road, you'll need to purchase business auto insurance to comply with relevant laws. Apart from New Hampshire and Virginia, every U.S. state requires commercial auto insurance for all commercial vehicles.
The exact state requirements vary for the required amount of insurance coverage.
For example, California requires you to have an insurance plan that covers at least $5,000 in property damages. In contrast, Colorado has a coverage requirement of at least $15,000 for property damages.
To see which coverage requirements apply to you, check out state-specific commercial vehicle insurance laws.
Can You Write Off Car Payments for Business?
If you're using a car for business, you can definitely write off various payments as business expenses and lower your business tax liability.
That said, the extent of tax savings the Internal Revenue Service (IRS) allows depends on a couple of factors.
Percentage of Business Use
If a car-related expense isn't due to a business purpose, you cannot subtract it from your taxable income.
Typically, you should document the percentage of your car's business use versus the percentage of its personal use. From that point on, make sure to multiply all your expense deductions by the business use percentage.
For instance, if your car expenses come out to be $15,400 and your car's business use percentage is 75%, you could only deduct $11,550 ($15,400 x 75%) from your taxable income.
If you only ever use your vehicle for business, then you can deduct all of its expenses from your taxable income.
Standard Mileage Rate
If you want a simpler way out, you can opt for the standard mileage rate to get tax deductions without any additional complexity.
To calculate the standard mileage rate deduction, multiply the number of business miles with the standard mileage rate set by the tax office. For 2023, that rate is 65.5 cents per mile.
For example, say your landscaping business owns a pickup truck, which you drove 9,000 miles in 2023. Here's what the tax deduction with the standard mileage rate would look like:
Business miles in 2023 = 9,000 miles
Standard mileage rate in 2023 = 65.5 cents per mile
Standard mileage deduction = 9,000 x $0.655 = $5,895
In other words, you can deduct $5,895 from your landscaping business's taxable income.
This method might look a lot easier than keeping track of vehicle-related receipts and purchases, and it is.
But don't run away with the idea that that's all there is to it. You still have to keep detailed records of your business trips, mileage, locations, and purposes to back up this deduction should the tax collector request an audit.
Alternatively, if you feel that your expenses exceed what's assumed by the standard mileage rate calculation, you can opt for the actual expense deduction.
To calculate an actual expense deduction, you'll first need to record all your car-related expenses in detail, including fuel, maintenance, insurance, and depreciation.
Next, sum them up to get the total expenses for your year-end tax documents.
Finally, multiply that amount by the business use percentage to arrive at your total car expenses for business purposes.
Returning to the landscaping business example, say you opt to use the actual expense method for the same pickup truck with the following expenses:
But wait: This table includes all the car's expenses, including when the pickup truck was used for personal errands.
True. But the business use percentage was 75%. In that case, the deduction comes out like this:
Total vehicle expenses = $10,450
Business use percentage = 75%
Actual expense deduction = $10,450 x 0.75 = $7,837.5
Notice that your landscaping business gets more tax benefits with the actual expense deduction than with the standard mileage rate.
That said, the situation might be different for your business, so try both options and see which one gives you the greater tax benefit.
Like any car, your company vehicle depreciates with use. To account for this decrease in value, include the depreciation expense in the income statement to further lower your taxable income.
The amount of expense you can deduct varies depending on whether you use the standard mileage rate or the actual expense deduction.
- Standard mileage rate: Standard mileage rate already accounts for the decrease in the vehicle's value over time, so you can't write off additional depreciation expenses.
- Actual expense deduction: You can use the modified accelerated cost recovery system (MACRS) to depreciate the car heavily at the start and slower later on.
Besides that, the IRS also offers a few other options:
- Section 179 Deduction: The 179 deduction gives your business a significant tax advantage at the start by letting you depreciate the vehicle you use more than 50% of the time for business by a higher amount, up to a specified limit. It's $28,900 for vehicles weighing between 6,000 lbs. and 14,000 lbs. in 2023.
- Bonus depreciation: Bonus depreciation lets you deduct a larger expense for a vehicle the first year it's placed in service. In 2023, you can deduct 80% of a vehicle's cost via this tax incentive.
- Straight-line depreciation: If you used the standard mileage rate in the first year and switched to actual expense deduction afterward, the IRS requires you to use the straight-line method to calculate your car's decrease in value afterward.
Growing Your Assets While Saving on Taxes
Buying a car for business is an excellent way to grow your assets and enjoy the added perk of sidestepping taxes. In other words, it's a win-win.
That said, the exact tax situation that applies to your business depends on your circumstances, so before purchasing a commercial car, consider consulting a tax professional for actionable tax advice.