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Buying a car for business explained

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If you're thinking of buying a car for business, you're not alone. Many people debate the option of buying a car for business use. Buying a car for your business is not just about operational convenience – it can unlock significant tax benefits like Section 179 deductions, build equity, and protect your personal liability. But is it the smartest financial move for you? Let's dive into the key factors, benefits, and alternatives that will help you determine if purchasing a business vehicle aligns with your goals.

Pros and cons of buying a car for business

First, determine whether a business vehicle is truly necessary for your operations. Consider your operational goals and your current financial situation, as well as your financial goals and what type of vehicle you need. Ask yourself the following questions to guide your decision:

What will the car be used for? Deliveries, driving to meetings either in or out of town, moving furniture? Anything else?
How often will it be used? If you need a vehicle for daily use, it's probably a good idea to buy one for your business. If you don't, consider alternative options such as corporate leasing or getting a business car subscription.
How many business-related miles do you estimate annually? This will affect your tax deductions down the line.
What type of vehicle would you need, and how much will it cost? These details will affect price and fuel efficiency, potentially making or breaking your decision.

These questions will help you envision how having a dedicated business vehicle could help—or hurt—your business. If you're still not sure, let's explore the pros and cons of buying a car for business and some alternatives to consider.

Pros of buying a car for business

There are several advantages to buying a car for business:

Tax deductions are available not only for insurance costs, but also for insurance premiums and other expenses.
Ownership allows customization, such as adding branding or utility features (e.g., shelving or cargo space), to meet specific business needs.
You can streamline your business operations a company car can allow you to take more meetings, complete more deliveries, or provide more assistance to your clients. It can also mean more flexibility for you and/or your employees.
It will protect your personal insurance costs. For example, if your business car is involved in an accident, it won't affect your personal insurance rates.

Cons of buying a car for business

There are also disadvantages that come with buying a car for business:

Cars are expensive, and depending on the type you need, it could come with high upfront costs. Make sure this investment is justified before committing.

Cars also cost a lot to maintain. Consider the costs of maintenance and repair as well before buying.

You will, of course, need business car insurance to cover the liability. The price of this is also something to consider.

Detailed record-keeping is required if you plan to take advantage of tax deductions. You'll need to keep mileage logs and hold onto repair and maintenance invoices as well as gas receipts.

Overcome these cons with all-inclusive pricing and high flexibility with a business car subscription. There's no long-term commitment with our car subscriptions; they can be paused, canceled, or restarted whenever you'd like.

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Choosing the right car for your business

If you've decided to buy a car for business use, the next step is choosing the right car. Take these key factors into consideration:

Size: Will you be transporting furniture or other large cargo? You may need a truck or a van. Is this a car purely for passengers and maybe some light luggage? A compact car or sedan may be more efficient.
Used vs. new: Of course, used cars will be much cheaper up front, but they come with their own set of issues. If you opt for used, have the car professionally inspected to make sure you won't be hit with costly maintenance or repairs soon after buying.
Appearance: If clients or customers will be seeing this vehicle, or even riding in it, choose a sleek, professional build with a comfortable interior. A beaten-up or worn-out vehicle can send the wrong impression.
Who will be driving it: If it will be driven by multiple people, opt for something straightforward to ensure it can be operated safely by anyone.
Fuel efficiency: Especially if you'll be using it for long drives, opt for something fuel efficient for your specific needs.
Company values: Is sustainability a core value? Consider hybrids or electric vehicles. Are you committed to supporting domestic businesses? Look at American brands like Chrysler or Ford.
Depreciation and resale value: If you're concerned about eventually needing to sell the vehicle, research models with lower depreciation rates.
Price: Don't buy a car your company can't afford. The right business vehicle for you is one that both checks all your boxes and fits your budget.

Choosing your ownership structure

Now that you've chosen your perfect vehicle, you're wondering how to buy a car for your business. The process isn't exactly straightforward, so let's break it down.

You can choose to own the vehicle under your LLC or corporation name, or you can buy as a sole proprietor or self-employed person. Let's break down the differences.

Owning a vehicle as an LLC

There are several advantages to buying a car for business under an LLC, such as liability protection, tax deductions, and extra privacy. If the car is registered to your business, your personal information won't be associated with it, affording you extra privacy and the ability to keep your personal and business finances completely separate. Tax deductions can also be available.

The process for buying a car under an LLC varies state by state, but generally, the steps are as follows:

1. Assuming your LLC is already established, you'll need to apply for an employer identification number (EIN) via the IRS. This number will enable you to open business bank accounts and take out loans. You can then purchase a car for your business using your EIN.
2. Set up a record-keeping system where you can record all expenses related to the vehicle, including the auto loan or up-front purchase. Your record-keeping system should have space for the date of each use of the vehicle, the purpose of each use, the mileage of each use, starting mileage of the year, ending mileage of the year.
3. Purchase the vehicle with your chosen financing option—either a loan or payment up front with your business account. List your company name as the buyer on all documents and keep everything for your records.
4. Register it under your business name at your local DMV.
5. Buy commercial auto insurance under your business name and be sure it covers everything you need, for example, extra insurance may be needed for transporting cargo as opposed to employees driving to meetings.

Owning a vehicle as a sole proprietor

Owning a vehicle as a sole proprietor or self-employed person is a little closer to owning a vehicle as a private person. In this case, there's no legal difference between the private person and the company. Unlike owning a car under an LLC, there will be no liability protection or financial separation, and this will require much more diligent recordkeeping.

This process can also vary by state, but generally, follow these steps:

1. Choose whether you want to use your personal name or a Doing Business As (DBA) name to purchase the vehicle. If you're using a DBA, this must be registered at your state office or county clerk.
2. Opening a separate business bank account is recommended, although not required. This will help keep expenses separate and make recordkeeping easier.
3. Purchase the vehicle with your name or DBA.
4. Register the vehicle with the same name you used to purchase it.
5. Buy the appropriate insurance under the same name.

How to finance and insure your business vehicle

Financing and insuring a company car is a little different from the process for a personal vehicle. First off, financing a business vehicle should be done from a business account, and any loans applied for should be in your business's name. A business auto loan from a bank usually has lower rates than third-party lenders—review the types of business auto loans available from different banks (not necessarily the one you have an account with) to determine what would be best for your business and the type of car you have.

Another important thing to consider is tax deductions on business auto loans: Payments made toward the principal loan amount are not tax deductible. You can, however, deduct payments toward the interest portion of the loan.

You'll also need commercial auto insurance to cover the liability. This will largely depend on what the vehicle is used for. Are you and your employees the only people riding in the car? Or will you be driving clients or customers? Will you be transporting cargo or food? All of this affects the type of insurance you choose.

Tax deductions explained

No matter which structure you choose, there are tax deductions available for things like maintenance, fuel, depreciation, and insurance. The first thing to understand when it comes to tax deductions, though, is Section 179, which lets businesses deduct the full cost of the business vehicle when they first buy. This only applies to your taxes the year you buy the car. There are two methods you can use to deduct your other vehicle expenses.

Standard mileage rate

This is a good method to choose if you don’t have many out-of-pocket expenses, such as maintenance, for your vehicle during the tax year. Each year, a flat rate is set per mile, making it easy to calculate your deduction based on the number of business miles driven. For example, in 2024 the rate was $0.67 per mile. If you drove 100 business miles in 2024, you would then multiply 100 by 0.67, resulting in a tax deduction of $67.

Actual expenses

The actual expense method is better if you paid for a lot of maintenance or repairs during the tax year, but it also requires more detailed recordkeeping.  Add up all the expenses related to your vehicle over the year: gas, maintenance, insurance, repairs, and registration fees, specifically for business use. If the car has been solely for business use, you can deduct this amount. If personal use was involved, you need to calculate those expenses only for the percentage of time that it was being used for business.

Business vs. personal use

Buying a car for business but planning to use it for personal reasons occasionally? The important thing is to keep close track of business use vs. personal use, whether it's by yourself or your employees. Personal use is any use that isn't directly related to doing business for the company. Here are some examples of personal use that are not tax deductible:

Commuting to and from work
Use during scheduled vacations or on weekends
Use by your or your employees' spouses or children

In these cases, keep detailed mileage logs for both business and personal use. All receipts relating to both business and personal use for gas, maintenance and repairs, and other expenses also need to be kept. This will help tremendously when tax time comes so you can accurately divide expenses and arrive at the correct deductions.

FAQs: Buying a car for business

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