An automobile is one of the most common tools for use by business. Since it represents such a large expense, it is good to understand how the IRS allows you to pay for the business use of your car.
If your business buys a car and uses it exclusively for business, then all of the car expenses can be classified as business expenses. However for most small businesses, it is rare that a vehicle is used exclusively for business use.
The IRS allows you to keep track of all the vehicle expenses on your personal vehicle and then divide them between your business and personal expenses based on how much the vehicle was used for each category. For example, if you used the car for 25% business and 75% personal, and you spent $5,000 on the car for the year, you can deduct 25% as a business expense, but the other 75% is considered a personal expense and is not deductible.
If you use a vehicle owned by your business for personal use, the IRS requires that you pay taxes on the business use of the vehicle as if it were income to you. There are several ways to calculate the value of personal miles on a business car. The most used method is to use an IRS table to determine the leased value of a vehicle. The employee would pay taxes on the leased value based on the percentage the car was used for personal use. The employee could also use the cents-per-mile valuation where they would pay taxes on the personal use based on the IRS standard mileage deduction rate.
If you use your own vehicle for business use, your business can reimburse you for the vehicle expenses at the standard mileage rate. If you drive a lot of miles for business and have an older vehicle, this can be a very good arrangement because often the reimbursement more than covers the cost of gas and maintenance on a vehicle. Since the payment is a reimbursement, you aren’t required to pay any taxes on it.
For more information on how to account for business use of vehicles, visit the IRS website, or ask a reputable accountant. With a little planning, you can find a method that will work out to the best advantage for you and your business.