Here’s an excellent question that I received recently:
“Thank you for your emails. I am about to buy a car, and I am trying to decide whether to make it a company car. My consulting business is a single-owner LLC, incorporated 3 years ago. Business mileage would be around 30-40%.”
By default, a single-member LLC is taxed as a sole proprietorship, unless you choose to be taxed as a C Corporation or an S Corporation by filing the appropriate paperwork with the IRS. If you haven’t elected to be treated as a corporation for tax purposes, your LLC will continue to be treated as a sole proprietorship.
So I’m going to answer your question based on the assumption that your business is a LLC that will continue to be taxed as a sole proprietorship.
Having said that, I’m not sure there is any tax benefit to making this vehicle “a company car.” Whether or not you put title to the car in the name of the LLC, you have the same options regarding how to deduct expenses for the vehicle. You can use the Mileage Rate Method or the Actual Expense Method, and either way, your vehicle expenses are deductible to the extent your car is used for business. If you use the Actual Expense Method, you would get a deduction for 30-40% of the actual expenses of operating the vehicle. If you use the Mileage Rate Method, you multiply the number of business miles by the IRS mileage rate (56 cents per mile for 2014).
As a sole proprietor, you report the vehicle deduction on Schedule C, Line 9.
There really is no additional tax benefit to buying the car in the name of the business. In fact, from a paperwork standpoint, doing so could unnecessarily complicate things. You’ll have to make sure that vehicle ownership and registration paperwork is done in the name of the LLC. And if you finance the purchase, it is unlikely that the lender will put the loan in the name of the business. Most lenders want a small business owner to be personally liable for the debt.
One final comment: you mentioned that business use is 30-40%. If you choose to use the Actual Expense Method and if the business use of the vehicle is 50% or less, you can only depreciate the vehicle using straight-line depreciation. You cannot take the Section 179 deduction or use one of the accelerated depreciation methods. Of course, it’s always wise to do an analysis of the Mileage Method vs. the Actual Expense Method, but when the business use percentage is this low, it may be that the Mileage Method results in a higher deduction.
For more info on how to determine the deductibility of your car expenses, check out this article: