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If you own a small business and are thinking about buying a new car, you may be toying with the idea of buying it for business use. In this way, you could reap some tax write-offs and other incentives. However, just because you run a business doesn’t necessarily qualify any kind of car purchase for business use.
There are many factors at play when it comes to buying a new car for business use. This is especially true if you intend to use the car for non-business or private use at least a portion of the time. Here is what you must look out for and what you may be entitled to.
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Your Business Structure Matters When You Buy a New Car
The first aspect of using a car for a business is the company structure. Sole traders and partnerships will need to work out their tax deductions and claims. They must either use the cents per kilometer method or the logbook method. The latter is recommended for claiming above 5,000km for all types of car expenses. This includes such items as fuel, insurance, repairs, maintenance, registration, and depreciation. The logbook tracks how much of your travel was for business purposes versus private use then makes the claims accordingly. Companies and trusts work out claims using receipts and invoices from traveling to clients or dropping off goods or other uses.
Watch Out for Fringe Benefits Tax with a New Car
If a company buys a car for an employee for private use, it may be subject to fringe benefits tax (FBT). If the employee uses the car for business purposes and your company compensates them for it (that is, contributes toward it) then that is an effective deduction of FBT. In some cases, you can claim the goods and services tax as credits on your business activity statement. You can also claim the interest paid on the loan.
Understand How to Claim Depreciation on a New Car
Understanding depreciation is critical. This is because you can claim depreciation, or the gradual loss of value of a car, as a tax deduction. The tax authorities allow you to calculate for depreciation during eight years of life at the rate of 12.5% for each year. Therefore, you need to figure out whether the price of the vehicle is reasonable enough that you will reap greater tax deductions owning it as a private individual and making business deductions or owning it through the business and contributing to the costs incurred by its use.
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Consider Using Commercial Finance
Using a car for business means gaining commercial finance alternatives such as a chattel mortgage or hire purchase. Though similar, a chattel mortgage works in the same way as a car loan, except that you can claim the interest the lender charges on the loan on your business activity statements. A business can also borrow more than 100% of the value of the car (or chattel) to amortize running costs and other upfront expenses. A hire purchase keeps the car “off the books” until you pay the loan, with all expenses being classified as operating expenses. Talk to a broker or your accountant to figure out which loan product is right for your business and its accounting methods.
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