You’re ready to buy a new luxury auto and you want to maximize your tax deduction. Should you title the car in the company name and have the company W2 you for personal use? Or should you buy it yourself and have the company reimburse you for business use? Consider the second option. Luxury autos titled to the owner of a business will yield substantially larger federal income tax deductions than the same car titled in the business name. Let me explain.
First, “luxury” refers to cars that have values exceeding the yearly depreciation cap using the five-year modified accelerated cost recovery system, MACRS. In 2005 that’s any car exceeding $14,800 in total value. (I laugh when I think my Mazda 3 is classified as a “luxury auto.”)
Let’s say you buy a BMW 530i at a capitalized cost of $48,760. You’ll pay cash and eventually trade it in for something similar. You’ll use the car 60 percent for business and 40 percent for personal use.
Title in Company Name
If you decided to title the car in the company name, the company is allowed to deduct 100 percent of the car’s expenses, even though the car has some personal use. The cap on depreciation for any luxury auto placed in service in 2005 is $12,185 over a four-year period. Add to that figure all other expenses to maintain the auto: fuel, maintenance, car washes, insurance, property taxes and interest expense, and the company can take a total tax deduction of $26,685 over the four-year period.
But we need to factor in your personal use. The company must regard it as a fringe benefit and include it in your gross income. To determine this amount the IRS requires you to assign a yearly value to the BMW using the Annual Lease Value Table. (It’s used for both purchases and leases.) The annual lease value is a percentage of the car’s fair market value plus the estimated value of all expenses to maintain the auto for a year. Fuel is not part of the annual lease value, but must be added, assuming the company pays for fuel. The annual lease value for a car worth $48,760 is $12,750. The total value over four years is $51,000. Your forty-percent share, then, is $20,400. Add an extra $1,800 in fuel cost, and the total added to your W2 for the four-year period is $22,200.
Subtracting the $22,200 for personal use from the $26,685 the company can claim leaves only $4,485 in tax deductions when the auto is titled in the company name.
Title in Personal Name
If the car is titled in your personal name, the company would then reimburse you for the 60 percent of business use under an accountable plan. You’d be reimbursed the same depreciation amount times 60 percent, or $7,311 total. Add actual expenses (fuel, maintenance, car washes and insurance) times 60 percent. Your total tax deduction when the car is titled in your personal name is $16,811. Remember, the company can only write off $4,485 over four years if the auto is titled in the business name. Personal ownership of the BMW offers $12,326 more in tax write offs.
Why? The big difference involves the Annual Lease Value Table. When it was instituted in the 80s there weren’t luxury auto depreciation dollar caps. Instead the allowed depreciation was calculated using MACRS, or, if the auto was used 50 percent or less for business, the straight-line method. Over the years the annual lease values continued to include an allowance for auto depreciation that was never limited by the caps. Remember, if the company owns the auto, you’ve got to use that table to calculate your personal-use fringe benefit. Your compensation for personal use is more than the tax deduction the company can take.
In general terms, the higher the cost of the car or the larger percentage of personal use will result in a greater tax benefit to the individual taxpayer if he or she owns the vehicle.