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Buying a vehicle for my business - cash versus financing, and how much may I use it for personal use?

• I own a six-month old single-owner LLC, which I operate out of my house. I want to purchase a car to use for my business. My company is a telecom-consulting business, so the primary use for the car would be to drive to client appointments and to take packages to the local shipping store. I typically don't do much personal driving during the week after business hours. I am not sure if I should pay cash for the car, or if I need to finance the car. Which is a better write-off? My wife has her car, and we use it primarily for family functions. So, how much could I use the company car for my own personal use without the risk of doing something illegal (tax-wise)? My wife would probably never use the car, even though she is technically an employee.

• Answer:

  As with many things, don't be blinded by the tax implications of the decision. Tax impact needs to be considered of course, but should NOT be the overriding consideration. It's just one of many factors. Although you can take a business expense for the finance charges, the the total out-of-pocket cost for financing will still be higher even with the tax savings. The highest tax bracket is 35% but most taxpayers will see savings of 15% - 28% at most. From that standpoint, paying cash will make more sense. However, other factors come into play, not the least of which is your cash-flow. Paying cash ties up capital that maybe could be better used for other business development. This is something that is often overlooked by the novice. If you wind up having to take out a loan for other business purposes as a result of paying cash for an expensive asset you may well wind up paying a higher interest rate for an unsecured loan or having to guarantee it personally -- other things to think about. If cash-flow is a consideration and ease of bookkeeping is a factor, leasing a vehicle may be just the way to go for a business vehicle especially if you can accurately predict your mileage requirements. Leases usually SUCK for the average wage-earner but are often an excellent option for business use. Resist any temptation to use the business vehicle for personal use, especially if you take a Section 179 deduction for the full purchase price. You don't have to account for business vs personal use, keep mileage logs, or other tedious bookkeeping tasks. If you own other vehicles for personal use, the IRS won't question your claim of 100% business use; just play by the rules and you'll be fine. If your wife uses the business vehicle for business use, that's not a problem. But if she hauls the kids around or goes shopping with it -- or if you do -- you're risking having its use challenged. Bending the rules occasionally probably won't trigger an audit, just don't let it become a habit.