Cars are expensive. If you include depreciation, owning a car can cost between $8,600 and $13,000 a year. Although some people get away with public transit and ridesharing, owning a vehicle may be a requirement for your small business or self-employment.
If you’re a real estate agent who needs to drive clients or a small business that needs to make deliveries, owning a company car isn’t a choice. However, you may not need to swallow the whole $8,600 to $13,000 a year cost of owning a vehicle. There are many ways to reduce your taxes by expensing the costs of your business-related car usage.
In this article, we reflect on what you can expense when purchasing and using a company vehicle.
What car-related costs can you expense?
Even if you use your vehicle for both business and personal use, you can still deduct a portion of car-related expenses from your taxes. Albeit, only a portion of the expenses such as gas and maintenance costs are allowed. You can expense parking fees related to your business and supplementary business insurance in full, however.
To figure out what percentage of car-related expenses to deduct, you’ll have to keep a tab on the business-related kilometres you’ve driven. Recording this is extremely tedious, but there are now many smartphone apps to make it easier. Only vehicle expenses that are reasonable and that have a receipt can be expensed. Painting your car pink, for example, would not be considered “reasonable” in most circumstances.
Common vehicle expenses include:
- Licence and registration fees
- Fuel and oil costs
- Interest on money borrowed to buy a motor vehicle
- Maintenance and repairs
- Leasing costs
How purchased and leased cars are expensed differently
One of the most important decisions in running a tax-efficient business is whether to lease or buy a vehicle. While buying a vehicle can be more cost-effective, leasing one can be more tax efficient.
When you purchase a vehicle, you can either purchase it outright or choose to finance it. When financing, you can expense any interest payments you make. But in both situations, you can claim a Capital Cost Allowance (CCA). The CCA allows business owners purchasing business assets to expense its value. This includes not only the purchase price but also any legal, accounting, or other fees associated with the purchase and the cost of improvements made to the asset. For cars, the maximum you can expense under this allowance is 30% of the car’s total cost (including any fees associated with the purchase from the prior list).
One caveat to the CCA is that you won’t receive its full benefits when buying a luxury vehicle, as the 30% only covers up to $30,000 (though this number slowly increases with time). If you’re a real estate agent who may need a luxury vehicle for your job, it’s often better to lease a car instead. This is because a lease is treated more similarly to an average vehicle expense.
While tax efficiency is important, it’s not the only thing to think about when deciding whether to lease or buy a car for your business. Car loan payments are usually higher than the cost of a monthly lease, leased cars usually have a maximum number of miles that you can drive on it, and buying a car means you’ll have to sell it once it’s no longer needed.
Purchasing a car for your business is a large investment and maximizing the tax savings you get with the purchase is a complicated process. Whether you choose to lease or buy, make sure that purchasing a car is a must for your company and not just a nice-to-have. To make the most out of your investment and expenses, speak to an accountant and do significant research first.