Just about every business needs a vehicle. Some use cars to visit customers, clients, vendors, or run business chores—to the bank, to see an attorney or other business advisor, or to scope out new business. Others use vans to carry tools of the trade to worksites. And still, others use cars or trucks to make deliveries or tote equipment. Whatever the purpose, business practicalities and tax rules impact buying and leasing business vehicles in 2020.
Buy or Lease Company Vehicle in 2020?
The perennial question that many small business owners ask when considering a new vehicle is whether to buy or lease. As a rule of thumb, leasing enables owners to obtain more costly vehicles than what they could afford if they’d have to buy them.
From a tax perspective, in claiming a deduction for business driving, the same standard mileage rate (e.g., 57.5 cents per mile in 2020) applies whether the vehicle is owned or leased. Those who deduct the actual cost of business driving need to figure which option—buy or lease—produces the greater write-offs. When a vehicle purchased in 2020 is a “luxury vehicle” (one costing over $90,000), special dollar limits cap the amount of depreciation that may be claimed. These limits can be adjusted annually; 2020 limits are here.
However, heavy SUVs aren’t subject to these dollar limits. There’s a special first-year expensing limit ($50,900 in 2020). And due to a special allowance called bonus depreciation, the full purchase price of such a vehicle can effectively be written off in 2020.
Leasing a vehicle valued at more than $50,000 requires the deduction for lease payments to be reduced by a so-called “inclusion amount,” but such amount is very modest. Again, 2020 inclusion amounts are here.
Taxes aside, as a practical matter, leasing may be out of the question if you expect to do a lot of driving. Most leases make it too expensive if annual mileage exceeds 15,000 or so (of course, depending on the terms of a particular lease).
Which vehicle to get?
Assess the driving for which the vehicle will be used. Factor in the cost of fuel (very low now but could rise in the future), insurance, and other operating costs to budget appropriately.
Consider that you may qualify for a tax credit if you buy a plug-in electric drive vehicle. The credit for a 4-wheel vehicle is up to $7,500. However, credits may be lower. The IRS has a list of eligible vehicles and their credit limits. For example, while the 2021 Toyota Rav 4 prime plug-in hybrid qualifies for the top credit of $7,500, the 2020 Ford Escape plug-in hybrid has a credit limit of $6,843. (There’s a credit for a 2-wheel electric vehicle, which expires at the end of 2020 unless extended.)
Note that no credit can be claimed when the manufacturer sells more than 200,000 vehicles, a benchmark passed by both Tesla and GM. As a result, no credit is allowed for a Tesla vehicle purchased in 2020, and the credit for a GM vehicle is only $1,875 for purchases in the first quarter of 2020 (i.e., no credit for a GM vehicle purchased after March 31, 2020).
What to do when employees use company vehicles?
If you let employees drive company vehicles, consider restrictions on personal use to conform with your insurance coverage. Also, think about how to deal with the tax implications of any personal driving. Allowing employees to use company vehicles after hours triggers a taxable fringe benefit (there are limited exceptions). There are different ways to figure the amount of the benefit:
- General valuation rule. Figuring how much an employee would have to pay a third party to lease the same or similar vehicle. This determination must factor in comparable terms and the geographic location. You may find this valuation rule hard to use because it is so facts specific
- Cents-per-mile rule. Multiply the number of miles driven for personal use by the annual IRS-set standard mileage rate (57.5¢ per mile in 2020). While this option is easy to figure, it can only be used if various conditions are met. For example, the vehicle’s value when first made available to the employee doesn’t exceed a set amount ($50,400 in 2020).
- Commuting rule. Multiply the number of one-way trips for which the vehicle is used by the employee by $1.50 if you require the employee to commute in the vehicle under a written policy and the employee is a “control employee” (e.g., owner or one who’s highly paid).
- Lease value rule. Figure personal use by looking at an IRS table of annual lease values. The table doesn’t change from year to year.
Find details about these valuation rules, as well as employment taxes on this fringe benefit, in IRS Publication 15-B.
What to do when employees use personal vehicles for company business?
Companies may not have to buy or lease vehicles if employees use their own cars, vans, or trucks for business driving. Commuting to and from work is never deductible. In the past, employees who itemized deductions were able to write off their business driving as a miscellaneous itemized deduction, but this option is suspended for 2018 through 2025.
Companies can help employees cover their business driving costs in a tax-advantaged way that benefits both employees and the companies. If an employer adopts an “accountable plan” (explained in IRS Publication 463), then reimbursement to employees for the business driving in their personal vehicles isn’t taxable to them. It’s not even reported on their Form W-2. The employer can deduct the reimbursements as business expenses and they aren’t subject to employment taxes.
Before taking any action, review your options with your CPA or other advisors to determine the best way to go.