Owners and employees of small businesses both enjoy the benefit of a company vehicle. Company cars allow the employer to take tax deductions while the employee saves on out-of-pocket car expenses. Plus, the current tax laws concerning company cars are more beneficial than the prior laws.
A company car saves the employees expenses while allowing the company additional deductions
When driving a company car, the employee can generally use that car for both business use and personal use. The value of the personal miles driven will be a fringe benefit wage. Fringe benefit wages are included with the employee’s other W-2 wages. Therefore, the employee’s true cost is the income tax resulting from including the value of the personal use mileage. Whereas, if that employee had purchased the car themselves, they’d be out-of-pocket for the entire purchase price of the car (plus operating and maintenance costs).
The company will treat the car as a business asset and it will be depreciated if the vehicle was purchased (i.e., not a lease). Maintenance, gas, insurance expenses for this vehicle are deductible, including the portion of these expenses that would be related to the personal use of the car. If the company did not purchase the car outright but had financed the purchase, the interest expense on that loan would be a deductible business expense.
If an individual were to purchase a new car personally, they would not be able to deduct any expenses (if the car is owned) nor the interest expense (if the car was financed). The expenses related to the business use of the vehicle would be considered unreimbursed employee business expenses. From 2018 until 2025, the Tax Cuts and Jobs Act eliminated all miscellaneous itemized deductions such that unreimbursed employee expenses are currently no longer deductible. Financing a new vehicle may also impact an individual’s credit score.
Company cars require documentation and complex valuation
When providing a company car to employees or owners, proper documentation must be maintained to track the personal use and business use of the vehicle. There are several good mileage tracker apps available to simplify logging business miles. For example, highly rated apps include Stride, MileIQ and Hurdlr – each offers a free and subscription version to track miles driven, The personal use of the vehicle must be treated as a fringe benefit and included in the employee’s income. Providing a company car can also be complex with the necessary valuation and documentation. However, a company-provided car is a great benefit for business owners and key employees because it can provide them with a vehicle at a low cost while also allowing for tax deductions for the business. Contact your Wegner CPAs tax expert with your questions on reporting fringe benefits related to personal use of a company vehicle or maximizing the deductions.