What expense category is Company Car?

A company car is a vehicle owned or leased by a business and provided to employees for business use. These vehicles can range from sedans and trucks to vans and specialized vehicles. It is important to understand how to categorize and account for company car expenses properly, both for tax purposes and internal financial management.

Company Car Expense Category

Expenses related to a company car can fall into several categories, and it's essential to understand how these intertwine:

Vehicle Expenses

These are the direct, ongoing costs of keeping the car running.

• Fuel Costs: Gasoline, diesel, or other fuel.
• Maintenance and Repairs: Routine servicing (oil changes, etc.) and fixing damage.
• Insurance Premiums: Coverage for accidents, liability, etc.
• Registration and License Fees: Costs to legally operate the vehicle.
• Tires: Replacement costs.
• Tolls and Parking Fees: Expenses incurred during business trips.

Depreciation

If the company owns the car, this is a crucial category.

• Depreciation is how the company recovers the cost of the car over its "useful life" (how long it's expected to last).
• IRS Publication 946 provides detailed rules on depreciation methods (e.g., MACRS) and limits.

Some important factors here:

• Basis: The car's original cost (purchase price, sales tax, etc.).
• Depreciation Limits: The IRS sets limits on how much depreciation can be claimed each year, especially for passenger vehicles.

Lease Expenses

If the company leases the car.

• These are the periodic payments to the leasing company.
• The deductible amount may be reduced by an "inclusion amount" that the company has to add to its income, depending on the car's value.

Employee Compensation

This is where things get tricky.

• If the company allows employees to use the car for personal reasons, that personal use has a value.
• The IRS considers this personal use a "fringe benefit," which is a form of compensation.
• The company must determine the value of that personal use and report it as income to the employee on their Form W-2.
• The company can then deduct this reported amount as a compensation expense.

Some Important Considerations While Classifying Company Car Expenses

Business vs. Personal Use 

• The portion of expenses directly attributable to business use is deductible.
• Personal use is generally not deductible.
• Allocation is Key: If the car is used for both, you must allocate expenses (e.g., by mileage).
• Commuting expenses are generally considered personal use.

Ownership vs. Lease

Ownership

• The company "owns" the car as an asset.
• Depreciation rules come into play to recover the cost over time.
• Details on depreciation methods (e.g., MACRS) and limitations are in IRS Publication 946.

Lease

• The company pays "lease payments" for the right to use the car.
• The deductibility of lease payments can be limited, especially for higher-value vehicles.
• IRS Publication 463 has specifics on "inclusion amounts" that may reduce the deduction.

Employee Use Policy

• Restrictions: Company policies limiting personal use are important for internal control but don't directly change the expense category.
• Fringe Benefit: If personal use is allowed, its value becomes a taxable fringe benefit for the employee (like extra compensation). The company must report this value on the employee's W-2.
• Reimbursement: If the company reimburses employees for car expenses, the reimbursement method (accountable vs. nonaccountable plan) dictates how it's reported and deducted.

Examples of Company Car Expenses

• Fuel costs
• Maintenance and repair costs
• Insurance premiums
• Depreciation expense (if owned)
• Lease payments
• Value of personal use included in employee income

Some Tax Implications of Company Car Expenses

Expenses directly related to business use are generally deductible.

• This includes fuel, maintenance, repairs, and the business portion of lease payments.

The value of personal use provided to employees may be considered taxable income to the employee and deductible as compensation expense for the employer.

• The employer can deduct this as a business expense, but it must be reported as income to the employee.

There are specific rules and limitations on deducting depreciation and lease payments, especially for passenger vehicles.

• These rules are designed to prevent excessive deductions for luxury vehicles.
• IRS Publication 463 provides detailed guidance on these limitations.

How Fyle Can Automate Expense Management

Fyle's expense management software can help businesses accurately categorize and track company car expenses. Fyle can automate the allocation of expenses between business and personal use, simplify depreciation calculations, and ensure compliance with tax regulations related to employee benefits.