Business Owned Automobile

By Jason Watson, CPA
Posted Sunday, December 29, 2024

If the business truly owns the car, then it should be titled in the business’s name. Having said this, loan and lease terms might be crummy. Another concern is higher insurance rates. It appears that most auto policies will charge a higher premium for cars owned by a business for business purposes. While the insurance businesses are regulated and must demonstrate the need for the premiums being charged, the higher amount appears to be a money grab.

Some insurance businesses will allow you to title in the business name and your name as joint tenants with rights of survivorship (JTWROS). This satisfies the IRS’s need for titling, and it might allow you to insure the automobile with a personal insurance policy. Talk to your insurance agent.

If you buy the automobile yourself and then transfer it to the business, you might be on the hook for sales tax twice (technically) although recently Departments of Motor Vehicles are understanding that a transaction did not take place. Also, your title might have a lien on it making it challenging to change titling and names.

Under Section 163(j) there is some relief. The automobile may be listed as an asset on the business’s books (balance sheet). Specifically, and in the case of a Partnership or S Corp, since the taxpayer owns both the pass-through entity and the asset, the taxpayer is both the legal and equitable owner of the asset. Therefore, depreciation expense may be deducted, and loan interest may be deducted even if the loan is in the individual’s name.

Leasing or Financing

If your business leases the automobile, the business portion of the lease amount is expensed. However, there are limits to how much can be expensed, especially for expensive or what the IRS would consider luxury automobiles. The disallowed lease payment is called a lease inclusion and is detailed in IRS Revenue Procedure 2016-23. The amount is added back into income and taxed, leaving only the IRS allowed portion as a deductible lease expense. So before you lease that brand new 911, call us. We’ll determine a plan after the joint test-drive.

Also consider that leases are generally bad, especially on business automobiles over $80,000 for three really big reasons. First, the residual value offered on a 36-month lease will be about 60% or $48,000. This is essentially what the leasing business believes the automobile will be worth after 3 years. Yuck #1.

Second, they take the degradation in value ($80,000 minus $48,000) and apply a capitalization rate of 8% to 12%. This is essentially your interest rate. Yuck #2.

Third, they put ridiculous mileage limitations such as 10,000 miles per year with heavy penalties for going over the limit. 10,000 miles is laughable for most modern-day business owners or families. Yuck #3.

Sure, if you lease a more economical automobile such as a Subaru Crosstrek for $30,000 then Yuck #1 goes away. But Yucks #2 and #3 remain. Also, automobile leases are generally not capitalized leases (they do not have a bargain purchase option) and therefore they cannot take advantage of the Section 179 deduction or Bonus Depreciation. Contrast that with your leased copier with a $1 buy-out option… this is considered “financing” or a capitalized lease, and the asset can be listed on your balance sheet, depreciated, painted purple, etc.

Liability

Another consideration- if you are driving the business car and get into an accident, the business might get into a liability rodeo just based on ownership. Proving that at the moment you were driving the car for personal reasons might not matter. We are not attorneys, but this scenario is not beyond possibility.

Personal Use

Lastly, and this is yet another big deal, any personal use must be considered taxable income as an employee of your S corporation. Don’t laugh, it’s true! How do you calculate the amount of imputed income? The easiest and most widely accepted way is to use the Annual Lease Value Table in IRS Publication 15-B Employer’s Tax Guide to Fringe Benefits.

For the 2025 tax year, the lease value of a $50,000 automobile is $13,250 annually. If you use the business-owned automobile for personal use 10% of the time, then $1,325 will be added to your W-2 and taxed as compensation (including Social Security and Medicare taxes, and all the taxes you would expect). Here is the link to IRS Publication 15-B-

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Under the “Cents-Per-Mile Rule,” you can also use the mileage rate of 70 cents (for the 2025 tax year), but there are strong limitations such as the fair market value of the automobile must be below $61,200 (for the 2025 tax year). That will preclude some automobiles. But let’s run the math anyways.

For example, you drove 15,000 miles and 5,000 miles were personal. You would need to add 5,000 miles x 70 cents (for the 2025 tax year) which equals $3,500 to W-2 income. And here’s the personal use kicker- if you are operating your car for less than the standard mileage rate (and you usually do), you will artificially be inflating your income.

Having a mixed use (personal and business) automobile be owned by the business sounds like a lot of work. Everyone at our office likes French fries, but we won’t run a mile for just one. Let’s make sure it’s worth it. Will the tax benefit of depreciation in the first two years offset the additional imputed income? Perhaps.

Keep in mind that it is difficult to justify 100% business use of an automobile if it is the only automobile you own- perhaps in Manhattan, but not for most Americans. Even if you have another automobile at your disposal, it still might not make sense to have your business own it. The question boils down to how many miles you will drive versus your ability to accelerate your depreciation versus your marginal tax rate today and the following years. At the end of this section on automobiles is an overly simplified flowchart to help you decide (or confuse the situation more).

LLC Owned But Using Standard Mileage Rate

If you are operating an LLC without the S corporation election, you might be tempted to use the standard mileage rate. Typically, this would be ill-advised- if you are using the standard mileage rate you are probably better off owning the automobile personally and be reimbursed by the LLC. However, there are situations where this might make sense.

Let’s look at the myriad of rules where using the standard mileage rate method is not allowed.

According to IRS Publication 463, you cannot use the standard mileage rate when you-

• Use five or more cars at the same time (such as in fleet operations), or

• Claimed a depreciation deduction for the car using any method other than straight line (such as MACRS), or

• Claimed a IRC Section 179 deduction on the car, or

• Claimed the special (bonus) depreciation allowance on the car, or

• Claimed actual car expenses for a car you leased, or

• Did not use the standard mileage deduction during the first year of use.

This makes sense. The IRS does not want you to exploit the system by claiming huge amounts of depreciation in the first year, and then switch to the possibly more lucrative standard mileage rate deduction. Here is the link for the IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses)-

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Again, if your LLC owns the automobile but is using the standard mileage rate and your LLC elects S corporation status for taxation, this asset needs an adjusted cost basis for depreciation within the corporation. Why? As an S Corp where the business owns the automobile, the business can only use actual expenses and depreciation is a part of that.

The calculation for determining the basis of the automobile is quite simple since the IRS publishes the depreciation amount within the standard mileage rate. Here’s the math from IRS Notice 2025-05–

Purchase Price, 2022	50,000
2022 Depreciation @ $0.26 per Mile for 10,000 Miles	2,600
2023 Depreciation @ $0.28 per Mile for 10,000 Miles	2,800
2024 Depreciation @ $0.30 per Mile for 10,000 Miles	3,000
Adjusted Cost Basis end of December 2024	41,600

In this example, if the LLC elects S corporation status on January 1, 2025, an asset would be created on the S corporation’s balance sheet with an adjusted basis of $41,600. The depreciation schedule for an automobile is typically five years, but when you switch from standard mileage rate to actual expenses (e.g., LLC electing S Corp status) the IRS requires you to estimate the remaining useful life. This is another conundrum. In this example, somewhere between two years and five years would be reasonable.

We just went over a ton of stuff under the Business Owns the Automobile section. Please look at a quickie decision tree later in this chapter.