A lot of employers will give their employees a company car for different reasons. For example, it can be used as a perk to attract top talent.
There are considerations to keep in mind as you decide whether or not to give employees a company car, and also in terms of what type of car to give employees.
There are logistic, financial, and legal considerations that you have to weigh as an employer. For example, what happens if your employee is in an accident in the company car?
The following are some of the things to think about if it's something you're considering in your business.
What is a Company Vehicle?
A company vehicle can be a car, truck, SUV, or van used by a business to do business operations. Something like a dump truck used as equipment is not considered a business vehicle.
With company vehicles, only business use of that vehicle counts as a deductible business expense. Personal use of a company car wouldn't be tax-deductible, and that includes when it's used for commuting to work.
The benefits of providing company cars include:
Employees may see being able to use a company car as a big benefit. This can be especially true for employees with families. A company car can give them a second vehicle, so they have more flexibility. It can also be especially valuable to employees who would otherwise have to rely on public transportation.
If your employee needs access to a specialized vehicle (although not equipment), you may be able to provide that through a company car.
When you provide company cars, it can allow you to have more control over the branding and image of your company. For example, if your employees are showing up to client meetings in an old car or one that's damaged, that's going to impact the image of your entire company. You might even be able to add your brand or logo to the car.
You can use a company car as a tax deduction, although it's important to maintain careful records and keep track of the differences in business and personal use.
The general downsides of giving an employee a company car can be:
You're putting yourself in a position to take on more risk and liability. Your company may also in some situations, be taking on risk and liability outside of business hours.
If you're purchasing cars, it can mean you need a lot of capital for a big upfront expense. A lot of employers will avoid this by leasing vehicles, but as with most things, there are downsides to leasing.
You may have to put in extra work to make sure you're accurately capturing personal versus business use.
Specific Considerations
For employers, some of the other particular considerations that are relevant include:
This was touched on, but you will have to decide whether you'll buy or lease if you provide company vehicles.
You'll need to have clear, defined guidelines in place before an employee ever gets behind the wheel of a company car.
Are you going to give your employees an auto allowance? An auto allowance can be given in addition to the company car, and it's meant as a way to reimburse employees for expenses related to the car. The allowance is a benefit that's not taxable for your employees. When you provide an allowance, you should use an IRS accountable plan, and your employee is responsible for providing you with the records that show business and personal use of the vehicle.
What If Your Employee Is In An Accident In a Company Car?
One of the biggest concerns employers tend to have about providing work vehicles is that they don't know what happens if the employee is in an accident.
For the most part and in the majority of states, if an employee is doing something work-related while driving a company-owned car, the company is liable for an accident as far as matters related to insurance.
However, if an employee is driving the car for personal reasons not related to work, then the employee is then liable for the accident.
Some companies will create a contract or policy that makes it liable or excludes it from liability if there is an accident.
The company's insurance policy is an important part of this too. Some companies will buy collision insurance to cover their employees who drive company cars, but there may be limitations or restrictions on that.
Choosing a Company Car
If you go through the pros and cons and determine that it's the right choice to get your employee or employees a company car, the following are things that can help you make the right choice:
Will you lease or buy? If you don't want to pay the cash up front, then you'll be better off leasing. When you lease company cars for your employees, all of the costs are usually part of a fixed monthly fee so things like maintenance and repairs are predictable. If you lease you also don't have to think about the annoyance of trying to sell it later on down the road.
Think about how the company car will mostly be used. If it's for your sales employees to cover a large territory, your priority is going to be on reliability and gas mileage. If it's more utilitarian, you may have other priorities.
Do your competitors provide cars to their employees? If so, what type of cars do they offer?
How will a car reflect your company branding and image? For example, if you're a company that emphasizes being green, you don't want your employees driving around in inefficient gas guzzlers.
Overall, it can be a big decision to provide your employee with a company car, but it may be one that's smart for your business.
Before you do it, ensure that you're prepared financially and that you're ready to keep detailed records for tax purposes. You'll also need to ensure your employee or employees are truly ready for the responsibility.
