Buying a Company Car vs Using the Mileage Deduction

We get this question at least twice a week for clients.

“My friend’s CPA told them to buy a car under the company name in order to save taxes, why don’t you recommend it? Even better I’ve seen Tiktok and Youtube videos from Tax Experts about how buying a company car is one of the best ways to save on taxes”

After we take a moment to smile, as we reflect on how Tiktok and Youtube videos are in the best marketing business as they are giving the viewer the answer they want to hear. We go into our logic behind our strategy and decision making process.

Our Reply:

1. A majority of clients want to buy their vehicle under their business name because of a few reasons.
   1. They believe the entire vehicle price can we deducted
   2. It is a good conversation piece when you it comes up as a topic of discussion, that your car is a company car. Lets admit it, it sounds cool and smart.
2. Tiktok videos, Youtube Videos, Social Media Posts feed on this “Want” and it creates good content. Unfortunately a 30 second video can’t truly walk through the analysis needed.
3. Even for some CPA’s and Tax Advisors, telling a client what they want to hear can make for good businesses.

So lets get to our reasoning

1. Buying a company vehicle is not a full 100% deductible.
2. When you sell or trade in the vehicle, you pay tax on the depreciation recapture (Part of the deduction you initially took)
3. In states like Texas- The car under the company name becomes a company asset, and you pay a annual personal property tax on the asset.
4. Personal use of the car percentage can not be deducted
5. You need commercial insurance for the vehicle which is typically higher.

When you add up the costs of the above points, most of the benefit of a company car goes away.

Example

Lets say you purchase a $100,000 car and lets say its 100% used for business and it is over 6,000 pounds so it qualifies for 80% Bonus Deduction. The deduction would be $80,000 and would save $20,000 in taxes

In 3-5 years you would trade that car in or sell it for say $70,000 and would pay tax on the $50,000 which is $12,500

So net you saved $7,500 in taxes ($20,000 savings-$12,500 you had to pay back when you sold the car.)

Now take the fact that in Texas you must pay personal property tax on all business assets including the car. At a average 3% property tax rate you pay $9,000 to $15,000 on the car in property tax over 3 to 5 years.

On top of that you pay for extra commercial insurance and much higher risk of audit. Additionally you didn’t save any money…but the dealership made money on you by selling you a more expensive car you don’t need or possibly can’t afford to get a tax deduction.

You are able to deduct things like gas, insurance and maintenance, but only for the business portion, which can be questionable if you say is 100% business related.

So when you really crunch the numbers, and look at the whole picture over 5 years, in many scenarios you aren’t really saving money.

Possible Solution

When you use the accountable plan to reimburse your self for business miles or business percentage use. It is a lot cleaner, so no surprise tax when you sell or trade in the car. No property tax annually on the value of the car.

Same example and lets say you drive 1,000 miles per month for business, so 12,000 miles per year. This at say 58cents a mile reimbursement rate would get you $6,960 in tax deductions each year at a lower rate and no recapture.

Hope that helps!