Benefits of Buying a Car Under an LLC
Wondering what the benefits are of buying a car under an LLC? For business owners, it’s a great way to reduce your personal liability and safeguard your privacy. Plus, you may be able to deduct most vehicle maintenance costs when filing your business income taxes.
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Advantages of Buying a Car Under an LLC
Many business owners choose to buy a car under an LLC. Why? Because purchasing a vehicle under your LLC’s name allows you to take advantage of some awesome perks.
- Privacy. When you buy a car under an LLC, you’ll list your LLC’s information instead of listing your personal name on the vehicle title, dealer warranty, loan release, and other corresponding documents. So, if anyone tries to search for the vehicle’s owner, they won’t find your personal information. Keep in mind, however, that the Articles of Organization you file to start an LLC are public record. Want to protect your privacy further? You may consider hiring a professional registered agent service that will allow you to list their address instead of yours on your public business filings.
- Liability protection. One of the best reasons to buy a car under an LLC is liability protection. For example, if an accident involving your LLC’s vehicle were to cause injury or property damage, the business’s liability protection can prevent you from personally having to pay legal or medical fees. In addition, your LLC’s assets could be protected from any personal debts. So, if a creditor were to take legal action against you (the human), property owned by the LLC would be protected.
- Tax deductions. During tax season, you can deduct vehicle expenses such as oil, gasoline, wiper fluid, or unexpected repairs on your business income taxes. However, keep in mind that these deductions often require maintaining detailed records of your mileage, receipts, and corresponding bills—more on this in the section below.
Things to Consider Before Buying a Car Under an LLC
Here’s a list of things you’ll want to consider before buying a car under your LLC.
- Tax benefits can be taxing. Although buying a car under an LLC means potential tax advantages, jumping through all the hoops can be more challenging than you might think. For example, the IRS will request proof that you’re using the vehicle for business purposes. You can typically do this in a written statement; however, the IRS may request additional documents (such as a map of your daily route) or verbal confirmation. You’ll also be required to submit all mileage logs and relevant receipts/bills to justify any expenses you wish to write off. Incomplete records could result in having to file again. You may want to seek professional help from an accountant.
- Your LLC might have to pay property taxes. A handful of states (such as Mississippi, Rhode Island, and Virginia) assess an annual property tax for cars. Typically, your local tax collector will determine your rates based on your vehicle’s current value. For example, Boston, Massachusetts, assesses $25 per thousand dollars each year of the car’s current value. Although not every business will have to pay property taxes, it could be an additional expense. So, check with your local tax collector OR do a quick search online.
- Your total cost. When you buy a car under an LLC, you could end up paying more money in the long run. For example, interest rates for business-related loans tend to be higher than personal loans. In addition, commercial auto insurance is often more expensive because they cover more for damages than individual plans. Plus, if you use your personal car more than 50% of the time for business purposes, most insurance companies will automatically consider your vehicle a commercial vehicle—resulting in a higher monthly fee.
How to Buy a Car Under an LLC
Ready for your LLC to buy a car? Follow the steps outlined below:
When an LLC purchases a car, the LLC must make all related payments. To establish a business bank account, you’ll likely need to provide your bank with a copy of your LLC’s EIN (Employer Identification Number) and business formation documents. You can apply for an EIN through the IRS website. There is no fee.
You can get a loan through your dealership or shop around at local banks and credit unions. However, lenders may ask for copies of your personal credit history—especially if you’re a newer business. In addition, you might have to provide a personal guarantee, promising you or another individual will take fiscal responsibility for the loan if the LLC fails to make payments.
After purchasing a car, you’ll need to register the vehicle with your local DMV (Department of Motor Vehicles). You’ll need to register the car under your LLC’s name—not yours.
Registration fees will vary between states and are typically determined by the vehicle’s year, current value, and weight. In addition, your county may assess additional fees or taxes. For example, Texas has a base fee of $50.75. However, most counties assess a local fee that averages around $31.50. In addition, the state requires all vehicles to pass an inspection before registering.
You will be required to get car insurance—regardless of where you live. However, you’ll want to purchase an auto policy under your LLC’s name—not yours. Commercial auto plans cost (on average) between $900 and $1,200 a year.
Frequently Asked Questions
Can my LLC buy a car for business and personal use?
Yes. However, using a car for business and personal reasons may reduce your overall tax deductions. For example, you won’t be able to deduct any mileage acquired through personal use of the vehicle. So, you’ll need to keep track of business mileage vs. personal. In addition, you likely won’t be able to deduct mileage for your daily commute.
Do I need to reimburse employees who use their personal cars for business purposes?
If employees use their personal vehicles for business purposes, you likely won’t be required to reimburse them. However, if the employee’s car expenses caused their income to drop below minimum wage, they would be entitled to a reimbursement.
Imagine you own a Washington LLC and pay a full-time employee the state minimum wage of $13.69 an hour ($547.60/week). Now, let’s say that employee pays an additional $100 each week for gas to deliver products to your clients. That means the worker is actually making only $447.60/week ($11.19/hour), which is below minimum wage.
Some states, such as California, Illinois, and Massachusetts, also require businesses to reimburse employees for company-related mileage. For example, Massachusetts requires companies to reimburse workers 57.5 cents per mile for mileage accrued during the workday (typically between 9 am and 5 pm).
Can my LLC deduct the cost of a car?
Your LLC’s vehicle must meet the following criteria to claim a Section 179 deduction:
- The car must be a passenger vehicle, heavy SUV, truck, or van.
- The LLC must use the car more than 50% of the year for business purposes.
The maximum deduction is determined by the overall weight of your car and the year it was first put into service. For example, most 2020 vehicles that weigh at least 6,000 pounds, but less than 14,000 have a maximum deduction of $25,900.
How does my LLC deduct business mileage?
There are two options for deducting your business-related mileage.
- Standard mileage rate—multiply your annual mileage by the current IRS standard mileage rate (57.5 cents per mile in 2020). Note that this method doesn’t allow you to deduct expenses such as gasoline, repairs, or insurance. In addition, you can’t use the standard mileage rate if your business owns five or more cars OR you take a Section 179 deduction.
- Actual car expenses—deduct your actual car expenses such as gasoline, repairs, insurance, oil changes, registration fees, garage rent, and tires. All businesses will qualify for this method.
If you qualify for both methods, you may want to determine which option gives you the most significant deduction.
Can my LLC claim the depreciation on a car?
Yes. However, the business must use the car at least 50% of the time for business reasons.
Generally, there are two methods you can choose from—General Depreciation System or Straight Line. The first option allows you to take a bigger deduction the first year, then smaller ones in subsequent years. Straight Line means you’ll have the same deduction amount for the life span of the car. According to the IRS, automobiles have a lifespan of 5 years. So, regardless of what method you choose, you’ll only be able to take the deduction for five years.
To determine and submit your deduction, you’ll need to file Form 4562 along with your business income taxes.