Understanding the Differences Between Company-Owned and Privately-Owned Vehicles for Expense Reporting

As a small business owner or self-employed individual, you likely use your vehicle for both personal and business purposes. But when it comes to reporting expenses related to your vehicle, it's important to understand the differences between company-owned and privately-owned vehicles.

The Internal Revenue Service (IRS) defines a company-owned vehicle as one that is titled and registered in the company's name, while a privately-owned vehicle is one that is titled and registered in the individual's name. Each type of vehicle has different rules and guidelines for expense reporting, so it's important to understand them to ensure that you are properly reporting your expenses and not overpaying on taxes.

Here's a closer look at the differences between company-owned and privately-owned vehicles for expense reporting:

Company-Owned Vehicles

If your business owns and operates one or more vehicles, all expenses related to those vehicles are deductible as a business expense. This includes expenses such as fuel, maintenance and repairs, insurance, registration fees, and even depreciation.

However, the IRS has specific rules and guidelines for how these expenses can be reported. For example, if the vehicle is used exclusively for business purposes, all expenses related to that vehicle can be fully deducted. But if the vehicle is used for both personal and business purposes, only the expenses related to the business use of the vehicle can be deducted.

To properly report expenses for a company-owned vehicle, you will need to keep detailed records of all expenses related to the vehicle. This includes keeping track of mileage for business purposes, as well as keeping receipts for all expenses related to the vehicle. It's also important to properly allocate expenses between personal and business use, to ensure that you are only deducting expenses related to business use of the vehicle.

If you provide employees with a company car, it is considered part of the Fringe Benefits (IRS pub. 15B) which the employee must pay taxes on. The IRS provides several alternative methods for determining the value of the personal use of the car for the employee. This value is then added to the employee's gross income so that it is taxed accordingly in the employee's salary.  

Privately-Owned Vehicles

If you use your personal vehicle for business purposes, you can still deduct certain expenses related to that vehicle. However, the rules and guidelines for deducting these expenses are different from those for company-owned vehicles.

To deduct expenses related to a privately-owned vehicle, you will need to keep detailed records of all expenses related to the vehicle. This includes keeping track of mileage for business purposes, as well as keeping receipts for all expenses related to the vehicle. You will also need to calculate the percentage of the total mileage for the year that was driven for business purposes.

There are two methods for deducting expenses related to a privately-owned vehicle: the standard mileage rate method and the actual expense method.

The standard mileage rate method is simpler and requires less record-keeping, but may not be the most advantageous method in all cases. The actual expense method allows you to deduct the actual expenses related to the vehicle, including fuel, maintenance and repairs, insurance, registration fees, and depreciation. However, this method requires more record-keeping . We have compared the two methods here.  

It's important to note that if you use the standard mileage rate method in one year, you cannot switch to the actual expense method in a subsequent year for the same vehicle. Once you have chosen a method, you must continue to use that method for as long as you own or lease the vehicle.

Conclusion

Understanding the differences between company-owned and privately-owned vehicles for expense reporting is important for small business owners and self-employed individuals. By keeping detailed records and properly allocating expenses between personal and business use, you can ensure that you are deducting the correct expenses and not overpaying on taxes.

If you are unsure about how to properly report expenses related to your vehicle, consult with a tax professional or accountant. They can help you navigate the rules and guidelines set forth by the IRS and ensure that you are reporting your expenses.