Best Tax Way to Handle Vehicles In a Business

Best “Tax” Way to Handle Vehicles in a Business

One of the most vexing questions for small business owners is how to deal with vehicles.  Here is why it’s a battle:

1. Virtually all small business owners use their business vehicles for personal use and vice versa.
2. Virtually all small business owners hate keeping tracking of mileage!

These two points create frustration.

In my opinion, the best way to handle vehicles is as follows:

1. Have the business buy vehicles that are used in the business.  I’m not talking family cars and vans, but vehicles clearly used at least some of the time in the business.
2. At each year end, write down the mileage on the odometer.  That will give you the beginning of year (BOY) and EOY mileage for each vehicle.  
3. Estimate what % of those annual miles are personal.  Note:  Commuting miles to work are (generally) personal use.  For example, let’s say you put 20,000 total miles on your pickup this year.  You have a 10-mile round trip to work.  If you went to work 250 days, that is 2,500 personal miles.  Let’s say you also took a personal trip that added another 2,500 personal miles.  That is 5,000 personal miles total.  That means 25% (5,000/20,000) of your total miles are personal.  
4. Look up the cost of the pickup on the IRS Annual Lease Value table (Can be found online).
5. Multiply the personal % determined in Point 3 x the Annual Lease Value in Point 4.  For example, let’s say you bought the pickup last year for $40,000.  From the chart, you can see the annual lease value is $10,750.  Take $10,750 x 25% (personal) = $2,687.50.  
6. The last step is to add that personal use amount ($2,687.50) to the driver’s W-2.  Most payroll programs allow this.  You either need to add an additional “bonus” amount (say $500) to cover the taxes, or add it to the person’s last paycheck of the year.  Doing the latter will simply make their net check smaller by the amount of the taxes on the $2,687.50.   

Essentially the business gets a full deduction for all business costs, and the driver only pays the tax on the personal use amount.  Just the tax on the personal use amount, not the personal use amount itself.

This is a super low-cost, low-hassle way to keep clear with the IRS.  In an IRS audit, one of the low-hanging fruits an auditor looks for is the personal use of company vehicles.  If you have a nice system as described above, you’ll look golden in an audit.   

It also helps keep things fair with employees who are using company vehicles personally.