Thinking about buying or leasing a vehicle for your childcare business? A company vehicle may prove a valuable asset to your daycare business. You have several important options to consider when it comes to your company vehicle. In this article, we explore buying versus leasing a vehicle, standard mileage deduction versus actual costs deduction, and depreciating your vehicle. Read on to find out more.
Do You Need a Company Vehicle?
Could your childcare business benefit from having a company vehicle at your disposal? You may want to consider acquiring a company vehicle for a variety of operations directly related to your daycare business:
- Using a company van for pick-up and/or drop-off services
- Traveling frequently between multiple daycare locations
- Attending training workshops, conferences, and professional development courses on a regular basis
- Running out on business-related errands daily or weekly, including going to the store to pick up supplies, meeting with your accountant or lawyer, or other business-related tasks on the go
As you are probably aware, vehicles in general are not good investments and they have the potential to cost your childcare business a lot more money than they are worth, so the first decision you will have to make is whether you really need a company vehicle in the first place. Basically, you must ascertain whether a company vehicle will add value to your business or drain your business budget.
Ultimately, if you decide that a company vehicle is right for your situation, you will want to move forward in a way that makes the most financial sense.
First, you will need to consider whether it’s better to purchase or lease your company vehicle.
Should You Buy or Lease Your Company Vehicle?
Whether you decide to buy or lease your company vehicle will depend greatly on your unique needs and situation. If you know you will put a lot of miles on your vehicle with lots of work-related travel, buying may be a better option than leasing. On the other hand, if you want a company vehicle with less commitment and the ability to upgrade on a regular basis, leasing may be for you.
Here are a few things to keep in mind about buying your company vehicle:
- If you decide that buying your business vehicle is the better option, we highly recommend purchasing a used vehicle. A brand new model is simply not a good investment for your business. Just as with vehicles purchased for personal use, the minute you drive your company car off the dealer’s lot, your car begins to depreciate in value. Within the first year or two of owning a new vehicle, you will likely lose several thousand dollars in its value, even with as little as 10,000 or fewer miles on the odometer. That’s money better invested into other areas of your childcare business.
- If you buy a company vehicle, you have the option to calculate the tax deduction related to your business vehicle using either the standard mileage deduction or the actual costs deduction. You aren’t locked into one deduction over the other, giving you the flexibility to find the biggest tax deduction for your company vehicle.
- If you buy a company vehicle, you can deduct the depreciation on the vehicle if you opt to deduct your actual vehicle expenses (more on that below). The IRS sets an annual income inclusion amount which limits how much you can depreciate your owned vehicle per year.
Here are some key points you need to know about leasing your company vehicle:
- If you decide that leasing your company vehicle is the better option, you will choose whether you want to calculate your tax deduction using the standard mileage deduction or the actual costs deduction. Once you use one of these rates, you cannot switch. You are locked into the deduction method you chose for the lifetime of the lease.
- If you lease your company vehicle, you can deduct your lease payments on your childcare business taxes if you opt to deduct your actual vehicle expenses. However, your tax deduction is calculated based on the percentage of business use versus personal use for your company vehicle. For example, if you use your company vehicle for 75 percent business and 25 percent personal use, your tax deduction will be reduced accordingly.
- Since leases do not depreciate, you cannot take any amount of depreciation for your leased vehicle.
As you can see, buying and leasing a company vehicle both have advantages and disadvantages. Once you determine whether buying or leasing your company vehicle is the better choice for your childcare business, you will want to consider which tax deduction to take.
Standard Mileage Deduction Versus Actual Costs Deduction
When it comes to your company vehicle tax deduction, you can either use the standard mileage deduction or the actual costs deduction.
The standard mileage deduction is pretty simple to calculate. You will need to keep track of how many miles you drove your company vehicle in a calendar year and how many of those miles you drove for business-related purposes. Once you determine how many miles you drove in a calendar year for business purposes, you will multiply that amount by a standard set by the IRS. (For example, in 2020 the standard was 57.5 cents per mile. This standard changes annually.) This number is inclusive of all the wear and tear, maintenance, and depreciation of your vehicle.
The actual costs deduction is a little more complicated. With this method you will deduct a percentage of the actual costs for your vehicle. These expenses may include your taxes on the vehicle, vehicle loan interest, insurance, maintenance costs like oil changes, tires, and breaks, and repair costs. With this method, you would divide the number of documented miles you drove for business purposes in a calendar year by the total number of miles you drove that year. The resulting figure is the total percentage of your expenses that you can deduct, also known as your basis.
So which method is right for you? In general, if you drive a very fuel-efficient vehicle that is relatively low-maintenance, the standard mileage deduction may make the most sense. On the other hand, if you find yourself putting a lot of money into car repairs, maintenance, etc., you may find you can take a bigger deduction by using your actual costs. Either way, you will need to document everything. Try both deductions and see which one saves you more money.
Finally, let’s take a look at how the depreciation of your company vehicle fits into the picture.
How Does Depreciation Factor into Your Company Vehicle Expenses?
The depreciation, or loss in value, of your company vehicle, is already factored into a standard mileage deduction. However, if you take a deduction based on the actual costs of your vehicle, you will also need to calculate its depreciation. Your company car’s depreciation is calculated based on the cost of the vehicle and the number of miles you have driven it in a calendar year. Depreciation lets you deduct a percentage of the value of your car every year until the purchase price is met. The only requirements are that you own the vehicle, use it for business, and deduct the actual expenses you incur. Keeping good records is essential to helping you calculate the depreciation of your company vehicle.
There are a few different ways to calculate depreciation, and your childcare business accountant can help you choose which method is right for your situation.
We hope you have found this overview of options for your company vehicle helpful as you navigate the decision-making process for your childcare business. Deciding whether to buy or lease a company vehicle, take a standard mileage deduction or an actual costs deduction, and calculate depreciation can become confusing, and the Honest Buck Accounting team is here to help. Call our team of professional accountants to learn how we help daycare businesses like yours maximize tax deductions and save money.