Tax

With car dealerships offering amazing bargains, now may be a good time to get a new business car, truck, or van. Decide whether to buy or lease the vehicle, and who should hold title to it.

If you own or lease the car:
If a personal vehicle is used for business, you can deduct the actual expenses of business use, including gas, maintenance, and depreciation if you own the car or lease payments if you lease it, or use the standard mileage rate set by the IRS ($.55 per mile in 2009).

If you are an employee of your corporation, set up an "accountable plan" to provide reimbursement to you for business use of the car; such reimbursement is tax free if done properly. Without such a plan, any deduction for car use is an unreimbursed employee business expense, which is a miscellaneous itemized deduction that can be claimed only to the extent that it is more than 2% of your adjusted gross income (AGI).

If you are a partner or LLC member, vehicle-related write-offs are claimed on Schedule E; they are not subject to the 2% limit applicable to shareholder-employees.

If you are a self-employed person, vehicle-related write-offs are claimed on Schedule C.

Idea: Keep good records of business use. Note the starting and ending odometer reading, the date, the destination and the purpose of each business trip. Keep a digital device, logbook, or other recordkeeper handy to make it easy to jot down this information.

If the business owns or leases the car:
If your corporation owns or leases the car, it claims the tax write-offs. It also reports the value of any personal use of the company car, which is picked up by you as income. The corporation can figure the value of your exact personal use (such as 30% of the time the vehicle is used during the year) or it can report 100% as personal use, in which case you must then deduct the expenses for your business use (in essence, the same treatment as if you had owned the car).

Non-tax benefits of company ownership:

• The vehicle is an asset on the company balance sheet.
• Your business gets more favorable insurance rates if the company has more than one vehicle.
• More favorable financing terms may be available.

Leasing versus purchasing
The decision whether to buy or lease a vehicle for business involves both tax and non-tax considerations. Tax-wise leasing may produce greater write-offs than purchasing—the only way to know for sure is to run the numbers on both options.

Leasing may be easier on your cash flow if your monthly payments are lower. It is a way for you to afford a more expensive vehicle than having to buy it. But leasing may be too expensive if you expect to drive the vehicle more than 15,000 miles a year.

Special types of cars
When deciding which type of vehicle to get, certain things should be kept in mind. In addition to practical considerations—required size and fuel efficiency—there are tax breaks to keep in mind.

There are dollar limits on depreciation that can be claimed annually on cars, light trucks, and vans weighing no more than 6,000 pounds. Heavier vehicles, such as certain SUVs, are not subject to these dollar limits; a deduction of up to $25,000 is allowed for the year of purchase, plus regular depreciation, to produce a sizable write-off in the year of purchase.

There are special tax breaks for purchasing certain environmentally-friendly cars (no breaks apply for leasing these cars):

• A tax credit for the purchase of certain hybrid or alternative vehicles. You can see which models qualify for tax credits at FuelEconomy.gov.
• A tax credit for the purchase of a plug-in electric vehicle. Find information about these vehicles at PlugInAmerica.org.