AUTHOR: The Dental CFO
October 29, 2021
We’ve gotten questions about company car usage and tax considerations from various dental practice owners and partners over the years. If you’ve been considering purchasing a company car or want to know more about the process, this blog is for you. Below, we’ve detailed what you need to consider from a purchasing and tax perspective.
How Do Dentists Benefit from Purchasing a Company Car?
As an owner, you can experience significant tax benefits by purchasing the vehicle in your company’s name. When you have your own practice, or part ownership, you can deduct business expenses that are necessary for the continued operation of your practice. And when it comes to vehicle-related costs, many business owners tend to use their personal cars for business purposes.
Having a dedicated company car is beneficial for a variety of reasons outside of tax deductions. Having a vehicle dedicated for business use can save wear and tear on your personal vehicle and allow you to make the most out of your business usage. However, owning a company car requires keeping diligent records to ensure it isn’t used for personal driving.
If you’ve been using your personal vehicle or letting an employee use it for business purposes, a dedicated company car would be a beneficial investment to consider from a tax standpoint and a business standpoint. Suppose you’ve been thinking of opening your own dental practice. In that case, a company car would be a valuable asset for managing your practice and receiving relevant tax deductions.
Considerations You Need to Make Before Purchasing a Company Car
If you’re considering purchasing a company car, it should be bought in the company’s name. The practice’s name should be present on the car’s insurance, registration, and vehicle title. It is recommended that you consider taking a loan through your business for this purchase rather than relying on your personal credit. Purchasing in your company’s name legitimizes the purchase through a business rather than an individual, something the IRS will consider.
Vehicle Size and Type
The vehicle’s weight and size are significant when buying a company car. Consider what is best for your business needs based on the kind of travel you would use a company vehicle for.
Suppose you need or can afford a vehicle that weighs more than 6,000 pounds. In that case, you can expense the entire cost in the year of purchase instead of depreciating over multiple tax years (assuming 100% business use). Your vehicle’s weight will determine if you can receive an immediate deduction or if you’ll receive your deduction over time.
The IRS defines a “luxury vehicle” as a four-wheeled vehicle with an unloaded gross weight of 6,000 pounds or less. A luxury vehicle’s cost will be depreciated over a time frame of 5 years. The IRS sets the actual amount you can depreciate annually, which varies slightly depending on your vehicle and usage.
Documenting the Business Usage of a Company Car
You will need to prove that the car is being used for business purposes more than 50% of the time. This provides an additional layer of protection from an IRS audit.
Logging your mileage will help, but it’s important to keep a record of where you’re traveling to. Business use can include but is not limited to driving between practice locations, traveling to meetings, conferences, and other professional activities, and buying and transporting supplies and equipment.
The IRS defines personal use of a car to include commuting miles, which would be home to work sites and then back home. It is paramount that you differentiate between personal and business usage by diligently logging your miles. Tax returns that may have seemingly lofty mileage deductions and business percentages are something the IRS may flag. Having your miles correctly logged and split into categories will help you document your eligibility for valuable deductions relevant to your usage and car type.
What is Depreciation?
Depreciation refers to the expensing of a significant asset, like a car, over a specific timeframe. The IRS uses different classes for assets, with each class being assigned a term. Most cars get a depreciation term of 5 years under IRS depreciation rules.
However, the depreciation rules vary depending on both the weight and usage of the vehicle. Heavy vehicles tend to have the highest tax deductions, whereas passenger vehicles typically don’t have as many tax deductions.
The depreciation deduction is based on the percentage of business use. Keep in mind that you may have to reimburse the IRS if you fall below 50% business usage in a calendar year.
What Vehicle Documentation Does the IRS Require?
Diligent recordkeeping will surely speed up the tax filing process and help keep the IRS at bay. We cannot stress this enough: You need to prove that you are using your vehicle predominantly for business, which can be done by adequately logging your mileage. Additionally, substantiating the costs of operating and maintaining the car over time will aid you come tax season. Keep all receipts related to using and servicing the vehicle.
Using a company account to pay these expenses whenever possible simplifies recordkeeping. If you must use personal cards or cash in these situations, be sure to keep your receipts as a paper trail so you can reference these purchases with proper documentation.
Mileage logs are essential to prove business usage. Even if you are using the vehicle 100% for business, using a mileage logging app can help you log your miles and differentiate your total miles driven from commuting miles, business trips, and personal trips. The more detailed you can be with your usage, the more likely you are to receive deductions.
Why The Dental CFO?
Our CFO level professionals can ensure you’re paying the least while making the most, giving you the ability to focus on your patients instead of the nuances of bookkeeping, tax preparation, and financial management.
There’s a lot to consider when thinking through the purchase of a vehicle for business use. Our credentialed tax professionals have years of experience in working with nuances in the dental tax niche. If you’re considering the purchase of a company car, know that The Dental CFO has a firm grasp on the stipulations set by the IRS and how you can make the most of every business asset, including your company car.
We’ve created a detailed breakdown of all the considerations you need to understand before making your purchase in our latest eBook, “Maximizing the Use of a Company Car,” to set you up for success and deliver the guidance you need to make the most of your purchase, immediately and over time.