For many small businesses, having an operational vehicle is a necessity. Construction, gardening, restaurants, and delivery services are just some examples of businesses that usually require some kind of transportation to operate efficiently. So how do you know what cars to choose? A car represents a serious investment for most small businesses, something that you probably can’t afford to mess up. Let’s take a look at the things you should consider when purchasing a car for your small business.
Standard Mileage Rate vs. Actual Costs
Having a company vehicle can have its advantages when tax season comes around. However, many business owners assume to much when it comes to deductions. Alternatively, some business owners keep poor records of how their cars are used, resulting in inaccurate estimates.
One choice you will have to make early on is if you want to deduct the cost of business use of the vehicle by the IRS standard mileage rate (as of 2012 it was 55.5 cents per mile), or by the actual costs of usage. Choosing the standard mileage rate means you deduct exactly the amount based off the miles you drove that year and the IRS’s rate. If you choose to deduct based off the actual costs you can take into account, the depreciation of the vehicle as well as any maintenance, repairs, and registration costs.
Sticking with the standard mileage rate will give you a reliable and consistent amount on your deductions that doesn’t change as the car depreciates in value. It is also better for your business if you are driving a lot of miles. You can also switch to actual cost deduction if you pick the standard mileage rate in the vehicles first year, allowing you more flexibility. Going with an actual cost structure works better for more expensive cars, as well as larger cars that might require more maintenance. Once you pick an actual cost deduction however, you cannot switch over to a standard mileage rate deduction.
So depending on your business, and how you use your vehicles, either option could work better. A pizza franchise with a fleet of small cars that gain of ton of miles per year will probably opt for a standard mileage rate, while a construction business that relies on large trucks and SUVs might be more inclined to pick an actual cost deduction.
Buy or Lease?
Another big question to ask yourself if you plan on getting a car for your small business is if you should buy or lease the vehicle. Leasing a car can give you the opportunity to drive a car that is normally out of your price range. It might be a good option for a quickly expanding business looking to continue its growth. However, you can’t deduct the depreciation value of the car unless you own it. Buying a car means that once the loan is paid off, you own it outright, while at the end of your lease you must return the car to the dealership. You still have the option to buy the car once you turn it in, but you might be scratching your head as to why you just didn’t buy it in the first place.
Buying a vehicle for your small business is a major investment. Make sure you know everything you need to know before buying (or leasing). Being aware of the type of vehicle you need, how long you might need it for, and the potential tax benefits will all make your decision easier.