If your employees need access to a car to perform their jobs, you may consider providing a company vehicle. A company car can reduce costs for your employees, but there are legal and tax implications to keep in mind.
Only business use is tax-deductible
According to the IRS, a car is a tax-deductible business expense if it’s only used for business purposes. So, if your employees use the vehicle for business and personal reasons, they must keep careful records.
The easiest way to do this is using a mileage app to track how many miles they drove for business and personal purposes. When your employees use the car for work, they need to note the date, where they went, and the reason they were traveling.
However, only certain types of travel expenses are tax-deductible. For example, commuting expenses are considered personal expenses, regardless of how far employees have to travel.
You may need additional liability coverage
Providing employees with a company vehicle creates significant risk, so you’ll need additional liability coverage. The exact insurance coverage you need will depend on how many cars you’re providing and what they’ll be used for. You may want to work with an insurance agent to ensure you have the right policies and adequate coverage.
You can provide an auto allowance instead
Providing a company vehicle is too expensive for many businesses, especially with vehicle prices so high. And in the past few years, insurance companies have increased rates for businesses providing company fleets.
If the costs for company vehicles outweigh the benefits, you might consider offering an auto allowance instead. A car allowance is an attractive benefit for employees, and it doesn’t have the hidden costs that come with a company vehicle.
An auto allowance usually involves giving employees a flat, monthly stipend to reimburse them for auto expenses. However, a car allowance is fully taxable since it’s not considered a business expense.
Have a vehicle use policy
Before providing company vehicles to your employees, it’s a good idea to have a vehicle use policy stating how you’ll handle vehicle damages. For instance, if your employee gets in a car accident while using the car for personal reasons, who is responsible for paying the insurance deductible? And if your employee is injured while driving the car for personal reasons, will you compensate them for any doctor or hospital visits? Having these details ironed out before providing a vehicle to your employees is a good idea.
You might also consider including a clause stating that only employees are allowed to use the company vehicle. That way, you won’t find yourself responsible for a family member who gets injured driving the car.
A company car isn’t a one-off expense—these vehicles must be maintained and serviced regularly.
Leasing vs. buying a company vehicle
Leasing is another option if you’re unsure whether you want to buy a company vehicle. Leasing is like renting a vehicle long-term—you’ll make monthly payments on the car for anywhere from two to five years. Once your lease ends, you can either return the vehicle or buy it outright.
Leasing has numerous advantages, including lower upfront and monthly costs, which can free up cash flow for other expenses. Plus, leasing often gives you access to newer vehicles, which can mean less ongoing maintenance. And at the end of your lease, it’s fairly simple to return the car and upgrade to a new one.
However, leasing contracts can be inflexible, and it may not be an option to change the agreement, even if your financial circumstances change. Leased vehicles also have mileage restrictions, and you might be penalized for excessive wear and tear. These factors can be challenging to manage if you’re not the one driving the car.
Before deciding whether to lease or buy a company car, weigh the pros and cons of each decision. Consider your budget and how often your employees will drive the vehicle. This will help you make the decision that’s best for your business.
How to choose the right vehicle for your business
Most companies provide their employees with sedans or standard-model SUVs, though this can vary depending on their job title. Here are a few things to consider as you’re looking for the right vehicle for your business:
- Safety ratings: Your employees will drive this vehicle regularly, so you can’t afford to skimp on the safety features. Check the safety ratings of any car you’re considering purchasing on NHTSA.gov. Look for vehicles with features like anti-lock brakes and driver assistance technology.
- Maintenance costs: A company car isn’t a one-off expense—these vehicles must be maintained and serviced regularly. And if your employees drive the car frequently for work, it will likely need even more maintenance work and repairs. As you compare your options, look for reliable vehicles with low repair costs.
- Vehicle ratings: Check JD Power, Consumer Reports, and Kelly Blue Book to review the reliability ratings of any vehicles you’re considering buying.
- Depreciation: Cars are a depreciating asset, but certain models hold their value better than others. Consider the depreciation factor for any vehicles you’re thinking about buying, especially if you plan to eventually sell it.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
