Misconceptions about Business Vehicles and Taxes

There are many misunderstandings around tax deductions related to business vehicles. One common one is that a business automatically receives a tax deduction for vehicle costs just because the vehicle serves a business purpose.

Usually, the vehicle is only partially used for business; often it’s the business owner’s personal automobile. Although it may be titled in the company name, expenses for a personal/business use vehicle aren’t considered business expenditures. Deducting vehicle costs as automobile expenses is actually an inflated deduction, and it may disguise wages that are actually subject to payroll taxes.

A genuine company vehicle is used almost entirely for commercial purposes; however, incidental personal use, such as driving home after work appointments, is acceptable. Routine commuting is considered non-incidental personal use.

Personal use of a company vehicle is a form of compensation to the user; in allowing an employee to use a company auto, a value for personal use miles will be added to his or her reported taxable wages. (Rates per mile are set each year by income tax authorities.) Similarly, a business owner’s personal miles will be added to his or her wages or profit distributions. Therefore, your mileage records and those of your employees must separate business miles from personal miles.

Rather than using company vehicles for personal purposes, it’s easier for the company to reimburse the owner/employees at the standard mileage rate when using their personal vehicles for business purposes. The general standard practice is not to title any vehicles used for personal purposes in the company name.