Building assets in your business is a good business practice. For example, although buying and driving behaviors for personal cars can be relatively predicted, this is not always true for company cars and their various users. Research into company car drivers found there is no such thing as the typical corporate car user.
Instead, there are different company needs and how they match with the employee driving the car. Car value, tax implications and the business model all govern the use and purpose of a company car.
Matching Value to Need
You get what you pay for. The most crucial part of auto value, when it comes to a business, is its usefulness. A Corvette used by a construction company offers nothing to your business, as it cannot move drywall. Thus, it’s essential to be able to search for a car by features and price. Popular Mechanics offers a solid list of car-buying and car-selling websites, with TrueCar, AutoTempest.com and Cars.com topping the list. They each include search features, allowing you to match your company’s needs while drilling down on price and MSRP.
How Assets Affect Your Business
A vehicle is an asset, and assets have an essential effect on your financial statements. If an investor is reviewing your company, you will need to provide them with a complete set of financial statements, including financial ratios that serve as metrics for your company’s health. The most common ratios are liquidity ratios that compare your assets to your liabilities.
Most small businesses only have cash in the bank as an asset, but many bills as liabilities. This makes the ratios less than favorable. The addition of a big-ticket asset, like a company vehicle, can push your ratios into the good column, as the assets increase at a rate greater than the debt.
When Expenses are a Good Thing
For most small-business owners, there is no difference between business income and personal income. It’s not as if you have another job outside of your business. For tax purposes, it’s best to let the company incur the expense of purchasing and maintaining the vehicle. This way, all the expenses are deducted from your business’s income to give you the lowest taxable income. The IRS allows for auto deductions and depreciation expenses under Section 179 of the Internal Revenue Code. Generally, the maximum first-year deduction for a company vehicle is $11,160, with the available deduction decreasing in value over the following three years.
The Liability of a Company Car
Ensure that your employees can pass a driving test, as everything that happens within the confines of that vehicle is your responsibility. Even if an employee is making a quick coffee run, the company is still liable for any accident that may occur. Upon insuring the vehicle, the underwriting company will assume anyone in your company has access to the vehicle. Your employees’ inability to drive safely and prudently may ultimately cost your company.
Have an Exit Strategy
Every entrepreneur should have an idea of what their company will look like in five years. Since a vehicle is a significant asset, you will need to know how and when to dispose of it. Most companies will trade in an old vehicle for a new one. If so, predict how much the car will be worth. It may be better to start a fleet and purchase a new car (or two) without disposing of the old one.
Perhaps looking ahead 5 years is not where you want to be? Are you thinking about selling your business? Would you like to know the value of your business? For more information, please visit my website, Business Valuation.
For more immediate assistance, you are welcome to send an email to Andrew Rogerson or call me at Toll-Free (844) 414-9700.
