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In theory, giving employees company cars in order to make their jobs easier sounds like the perfect idea. However, things are not as simple when you decide to purchase business cars as they would be if you got a personal vehicle. Cars are very desirable employee benefits, but there are rules both you and the employees must respect, as well as taxes that need to be paid and documents that need to be gathered. 

For certain jobs, business vehicles are considered working condition benefits, in which the employee needs the car in order to perform their job. This comes with a range of considerations as well. 

The following article will explain some of the legal and tax issues related to purchasing company cars for employees, so keep reading to find out more.

But first things first…

What are the working condition benefits?

The IRS describes working condition benefits as either property or services an employer provides to an employee so that they can properly perform their job. For example, a salesperson usually needs to drive a route or meet clients, which means a car can be considered a work condition benefit for them. 

Working condition benefits are not taxable to the employee, but only if the car is allowable as a business expense. 

What expenses can be deducted?

Whether it’s you or the employee who drives the car, you need to remember that only business use of that particular car is going to be deductible as a business expense. This means you can’t take your kids to school, or go grocery shopping on the company’s money. 

Ideally the driver should keep records of the car’s business use and present it to you at the end of every month. These records should usually be completed at the time of the event. You can consider a mileage app, to make things easier for both you and the driver, as it also provides useful reports. 

The auto expenses will be included in your accountable plan, meaning they need to have a legitimate business purpose in order to meet the IRS standards.

Keep in mind to also check the IRS mileage standard rate each year, as there can be changes that you need to know about. For example, the standard mileage rate for business driving in 2020 is 57.5 cents per mile for business miles. 

Leasing or buying business cars?

If you plan to get a few company cars for employees, you need to consider whether you will be buying or leasing the cars. While the decision is entirely up to you, there are some aspects you need to keep in mind, in order to make an informed choice. 

For starters, if you choose to lease a car, you won’t be able to apply for a depreciation deduction, which means no more extra money when the car gets old. To put it simply. depreciation represents a deductible expense for the cost of the vehicle, spread over its useable life.

Remember that leased cars also have mileage limits, and if you go over these limits, you can get penalized. This does not happen for purchased vehicles. 

Take into consideration factors such as initial costs, insurance, wear, and tear, as well as how many cars you need. As some of the best ofallon Mo car dealers recommend, ask yourself some questions before deciding whether to buy or lease: 

  • Do I have the money for a down payment?

  • How many miles will my employees be driving each year?

  • What do I do with the car once it gets old?

Auto allowances – what are they?

Employers that don’t want to end up buying a fleet of vehicles can give employees auto allowances, to reimburse them for driving a car for business purposes. Sometimes this allowance is given in addition to a company car, but most of the time it is given precisely to help the employee rent or use a personal car for business purposes.

These allowances are also nontaxable, as long as you make sure it is given through an accountable plan. If you are wondering what an accountable plan is, it is basically a set of procedures your business needs to follow in order to account for the money you give to employees. 

This way, the IRS ensures they only reimburse legitimate business expenses.  

Remember to keep a good record of the car’s use

If you do decide to give some of your employers a company car, do make sure they keep very good records of the car’s use, because you will be needing those to determine the amount of business driving. 

Each employee who uses a company car should have a document they need to complete for every business drive they take. The sheet should include information such as date, time, route, and reason for choosing the said route. 

Some of the situations you need proof of business driving are:

  • Reimbursing employee expenses

  • Proving business use 

  • Deducting depreciation expenses

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