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When Your Business Requires Wheels - Business Vehicle Expenses
| Guest post by: Brenda Parker |
Article Overview: What expenses can your business claim for operating a motor vehicle.
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Free Download - Accounting - Beyond the Tax Return By Brenda Parker |
When Your Business Requires Wheels - Business Vehicle Expenses
With each earned dollar being taxed, business owners want to make sure that they claim all the expenses to which they are legitimately entitled to. In some cases, a good portion of their expenses come from the vehicle which they need to use in their business. Often the first question that comes up is whether they should lease or buy? One thing that may affect the decision is the interest rate difference between your two options. For example, the rate to buy may be 1 % versus a leasing rate of 4%. Another is the monthly payment which your cash flow can afford. Often the payment on a monthly lease is less because you are financing the difference between the price of the car and it's residual value at the end of the term as opposed to the full purchase price of the vehicle. Sometimes it comes down to personal preference.
The next question that comes up is whether there's a difference with leasing versus buying when it comes to income tax. Basically costs of a vehicle, no matter whether you lease or buy are deductible if they are incurred in the course of conducting your business . There are differences however, in how they are calculated. You are entitled to deduct operating costs of the vehicle including gas,oil,registration, repairs and maintenance and insurance. As well you may deduct expenses which reflect the actual usage of the car over time as it loses its value. If you lease, you may deduct the lease payments as expense each year. If you buy, then you are entitled to depreciation expense which is based on rates sets by CRA. Interest incurred to finance a vehicle is deductible as well. However, be aware that there are restrictions set by CRA as to the maximum allowable lease payment that can be deducted each month or the total capital cost of a car which can claimed through depreciation. Speak with your tax professional if you need some guidance. CRA has different classifications and definitions for vehicles. Basically the CRA rules are designed so that we end up driving what is practical for the business and not something extravagant.
Depending on the time of year when you acquire a vehicle, there may be some timing advantages in that first year whether you lease or buy. If you lease in January, for example, you will have a full year's worth of lease deductions. If you buy, then you can only claim six months worth of depreciation in the first year due to the half-year rule which CRA applies in the first year of acquisition. On the other hand, if you obtain the vehicle in December then you can lease and have one month's worth of lease payments to deduct or you can buy and deduct six months of depreciation.
The discussion above is assuming that your vehicle is used 100% of the time for business. If you do use your vehicle for personal use as well, then the amount that you claim for your business must be prorated. Also, there are situations where the cost of the vehicle, the type and the amount of business use versus the personal use may affect HST/GST deductibility and employee benefits if you provide your employees with the personal use of a business vehicle. Again, speak with your tax professional if you have questions. As well, when the use of a vehicle is a mix of business and personal use it is important to keep a mileage log. It may be the only way that you can help defend your business use if CRA questions it. Some business owners will use a personal vehicle and charge their business a reasonable mileage rate to cover the costs used for business purposes. Again , it can't be stressed enough that a good mileage log helps support your claim.
Hopefully this article will give you an idea of what is involved when your business needs wheels.
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About the Author: Brenda Parker RSS for Brenda's articles - Visit Brenda's website
Brenda Parker operates Scotia Accounting and Tax Services located in Stellarton, NS, Canada. After graduating summa cum laude from St. Mary's University in Halifax with a B Comm in Finance and a BA in Economics, she worked for a national grocery firm in various departments with her last role being assistant manager of Taxation. During this time she attained her Certified General Accountant's designation. Since getting her CGA, she has worked in various management/accounting positions for government ,public accounting firms, and as controller of a regional hotel chain and a new car dealership. She is a Simply Accounting Certified Consultant and Quickbooks partner. In her accounting practice she has served both large and small clients in a wide variety of sectors. From personal taxes to businesses in manufacturing, wholesale, retail and services to charities and not-for-profit organizations. She has clients from Cape Breton Island, NS to Montreal, Quebec to Calgary, Alberta and in many locations in mainland NS. All information in her articles is offered without prejudice and she advises readers to consult a professional accountant in person in regards to their personal situations. Click here to visit Brenda's website   Remembering Taxable Benefits Dig hard for those valuable tax receipts and reap the rewards Registered charities perform valuable work in our communities Back to School tax tips 2 Bartering 101 Tax Implications |
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