Woman loading flowers into the back of a van.
Before you consider the details of providing a company car, make sure you need the car in the first place. You may want to instead issue an auto allowance to traveling employees. — Getty Images/svetikd

If your employees need access to a car to perform their jobs, you may consider providing a company vehicle. This benefit can be helpful, but you should keep these legal and tax implications in mind.

[Read more: 10 Fleet Management Tools for Small Businesses]

Only business use is tax-deductible

According to the IRS, a car is a tax-deductible business expense if it’s only used for business purposes. So if your employees use the vehicle for both business and personal reasons, they’ll need to keep careful records.

The easiest way to do this is by using a mileage app to keep track of how many miles were driven for business and personal purposes. When your employees use the car for work, they need to make a note of the date, where they went, and the reason they were traveling.

Unfortunately, commuting expenses aren’t tax-deductible, regardless of how far your employees have to drive to get to work.

[Read more: 10 Tax Deductions Your Business Should Know About]

Company cars will need routine maintenance

A company car isn’t a one-off expense — these vehicles will need to be maintained and serviced regularly. And if your employees drive their cars frequently for work, the cars will likely need even more maintenance work and repairs. Eventually, you may have to replace the vehicles altogether, which can be another costly expense.

Before providing company vehicles to your employees, it’s a good idea to have a contract in place stating how you’ll handle damage to the vehicle.

You may need additional liability coverage

Providing your employees with a company vehicle creates significant risk, so you’ll need additional liability coverage. The exact amount of coverage you need will depend on how many cars you’re providing and what they’ll be used for.

Working with an insurance agent to determine your exact needs is a good idea. They can ensure that you have the right policies and adequate coverage in place.

[Read more: Commercial General Liability Insurance Guide:Everything You Need to Know]

You can provide an auto allowance instead

For many businesses, providing a company vehicle is too expensive, especially with vehicle and gas prices at record highs. And in the past couple of years, insurance companies have increased rates for businesses providing company fleets.

If the costs for company vehicles outweigh the benefits, you might consider offering an auto allowance instead. A car allowance is an attractive benefit for employees, but it doesn’t have the hidden costs that come with a company vehicle.

An auto allowance usually involves providing a flat, monthly stipend to your employees to reimburse them for auto expenses. However, a car allowance is fully taxable since it’s not considered a business expense.

It’s a good idea to have a contract in place

Before providing company vehicles to your employees, it’s a good idea to have a contract in place stating how you’ll handle damage to the vehicle. For instance, if your employee gets in a car accident while using the car for personal reasons, who is responsible for paying the insurance deductible? And if your employee is injured while driving the car for personal reasons, will you compensate them for any doctor or hospital visits? Having these details ironed out before providing a vehicle to your employees is a good idea.

You might also consider including a clause that states that only employees are allowed to use the company vehicle. That way, you won’t find yourself responsible for a family member who gets injured driving the car.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published July 20, 2022