Fiscal Issues (7): Car
Bart Van den Bossche writes:
One question I get asked about concerns the fiscal treatment of a car purchase for a self-employed person's business.
In this article 'your business' refers to a self-employed lawyer using either a bvba/sprl or conducting his/her business as an individual person (as explained in the earlier Corporate Form article).
Please note: this information is for general purposes only and simplifies some issues (particularly regarding leasing). You should get professional advice regarding your specific situation before buying or leasing a car.
A basic point regarding using a car for your business is that the tax authority usually deems the car to be used for mainly professional but also for some personal use.
Only in certain circumstances, such as where a self-employed lawyer has 2 cars (one 100% for professional use and another 100% for private use), can 100% professional use of a vehicle be justified.
So while the car's main use is professional, keep in mind you must calculate and declare the professional/private usage split for your annual business and personal tax declarations.
Often but not always - the car's mileage is used to determine the professional/private split. Usually the first 5000 km mileage is deemed by the tax authority for private use and everything else for professional use.
You personally will be taxed on the % of the car's usage that is a personal benefit to you.
Only 75% of the professional use is tax-deductible (items such as insurance and maintenance). Fuel and interest repayments are 100% deductible.
Your accountant can help you calculate the professional/personal usage split and your personal tax liability.
Your business has a choice between either purchasing or leasing the car.
As this article is for self-employed lawyers, I am sure you know more about the different legal rights and obligations arising from purchasing and leasing than me! But in case any reader has a doubt, in very general terms:- purchasing a car means that your business buys and owns the car (and has all the rights and obligations of an owner);
- leasing a car means your business hires a car for a certain period of time from a leasing organisation and when that time has expired the car is returned to that organisation. The rights and obligations of each party are usually set out in the lease agreement.
Two fiscal issues arise with purchasing a car for your business: how is this cost treated in your business accounts and what is the tax treatment of the method of financing the car. Each is considered in turn.
1. Cost depreciation. As a car's lifetime is normally greater than one year, the car is not usually treated as an expense i.e. a business cost that is deducted over the course of a single business year.
Instead, the purchase price of the car is depreciated over its expected lifetime. That means this cost is spread out over the car's expected lifetime for your business' accounts.
Such depreciation can be illustrated with a simple example of a car being used 100% for business use: X's business buys a car for €10000 with an expected lifetime of 5 years. Over the 5 year period, a cost deduction of 75% of €2000 per year (or €1500 per year) can be made by X's business.
Please note: while this so-called â€œstraight-lineâ€ depreciation is most likely to be used, there are other depreciation methods that can be used in particular circumstances. Your accountant can explain them to you further.
2. Purchase financing tax implications.How you finance the purchase has tax consequences as your business can either:
A. Use money your business already has to make the purchase. You must be careful about what money can be used. As a car usually has a lifetime for longer than one year, your business can pay with gross revenue for up to that first year. The remainder of the money must be paid with money that has already been taxed.
This point can be illustrated by continuing the earlier 100% professional use car example: so X has bought the car for €10000. X can pay €1500 (75% of €2000) with untaxed money arising from his/her business for that business year and the remaining €8500 must be paid with cash that the business has already been taxed on.
Why this difference in pre- and post-tax cash? If X is allowed to pay for the car with only untaxed money, then X minimises his/her taxable income in year one for a cost that is going to be incurred over a further 4 years.
B. Borrow the money from a financial institution and pay the loan back with interest. The interest on the payment is 100% tax-deductible. The capital payment is deductible as a part of the yearly depreciation at 75% of the professional use.
There are 2 sorts of leasing (operational and financial). These types are briefly described and then their fiscal implications are considered.
Operational leasing.This is a straightforward lease of a car: usually your business rents the car from the leasing organisation for an agreed period of time, paying for the car on a monthly basis. The leasing company remains responsible for issues like the car's maintenance and insurance. The fiscal implications of this kind of leasing are:
1. No cost depreciation. Leasing the car is treated as an expense (your business does not own the car) and the monthly cost of rental is deducted within your business' fiscal year.
B. Tax implications.Your business can either:
- Finance the monthly car leasing out of monthly gross revenue; or
- Borrow the money and pay back the loan with interest (and the capital repayment is 75% tax-deductible and the interest repayment is 100% tax-deductible).
Financial leasing. This is a mixture of purchase and operation leasing as your business starts by leasing the car and can eventually own the car. Usually your business borrows money from the leasing company and buys the car from the leasing company. Your business repays the capital and interest to the leasing company. Your business is responsible for the car's costs (like maintenance) and at the end of the repayment period has the option of purchasing the car outright.
The fiscal implications are:
1. Depreciation.Similiar rules apply to those described above for a car purchase.
2. Tax implications.Again, capital repayment is 75% tax-deductible and interest repayments are 100% tax-deductible.
Related car costs
Generally most related car costs, such as car insurance and maintenance, are annual. If so they are treated as expenses and are 75% tax-deductible.
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Related articles for self-employed lawyers:
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Lawyer-Accountant: Practical advice
Author: Bart Van den Bossche ©
First published: 11 January 2006
Last updated: 19 August 2006