Can My LLC Buy My Car and What Are the Tax Implications?

An LLC acquiring a vehicle involves procedural and financial considerations, particularly regarding tax implications and ongoing compliance. Understanding how an LLC can purchase or receive a vehicle, the available tax deductions, and the importance of meticulous record-keeping helps ensure the LLC benefits from potential tax advantages while adhering to regulatory requirements.

Methods for LLC Vehicle Acquisition

An LLC can acquire a vehicle through a direct purchase. When purchasing directly, ensure the bill of sale and vehicle title are in the LLC’s legal name. All acquisition funds should originate from the LLC’s dedicated bank account, maintaining clear separation from personal finances.

Alternatively, an individual owner can contribute a personally owned vehicle to the LLC. This process requires formal documentation, such as a contribution agreement or a bill of sale, transferring the vehicle’s ownership from the individual to the LLC. The vehicle’s title must then be officially changed to reflect the LLC as the new owner with the relevant state Department of Motor Vehicles (DMV) or equivalent agency. For tax purposes, the vehicle’s “basis” in the LLC’s hands is generally the lower of the owner’s adjusted basis or the fair market value at the time of contribution, which influences future depreciation calculations.

Tax Treatment of LLC-Owned Vehicles

Once an LLC owns a vehicle, various expenses associated with its business use can be deducted. These typically include costs such as fuel, oil, routine maintenance, repairs, insurance premiums, registration fees, and new tires. For vehicles acquired through financing, the interest paid on the vehicle loan may also be deductible. For leased vehicles, the lease payments themselves can be considered deductible business expenses.

Businesses generally have two primary methods for deducting vehicle expenses: the actual expense method or the standard mileage rate. The actual expense method requires meticulous records of all vehicle-related costs, allowing the LLC to deduct the business portion of every expense incurred.

The standard mileage rate offers a simpler alternative, allowing a deduction based on the number of business miles driven. For the 2025 tax year, the standard mileage rate for business use is 70 cents per mile. This rate is designed to cover the costs of operating a vehicle, including depreciation, and is adjusted annually by the IRS. If the standard mileage rate is chosen, an LLC generally cannot also deduct actual expenses like fuel, oil, or maintenance, though parking fees and tolls can still be separately deducted.

Depreciation is a significant tax consideration for LLC-owned vehicles, allowing the business to recover the cost of the vehicle over its useful life. The Modified Accelerated Cost Recovery System (MACRS) is the standard depreciation method for vehicles used in business, classifying them as five-year property. This system allows for larger deductions in the earlier years of the vehicle’s life.

Beyond MACRS, businesses may be able to utilize Section 179 expensing and bonus depreciation to accelerate deductions. Section 179 permits an immediate deduction for the full purchase price of qualifying equipment, including certain vehicles, up to a specified limit. For 2025, the maximum Section 179 deduction is $2,500,000, and this deduction begins to phase out once total equipment purchases exceed $4,000,000. Vehicles must be used more than 50% for business purposes to qualify for Section 179. A specific cap of $31,300 applies for 2025 to the Section 179 deduction for heavy SUVs and certain other vehicles with a gross vehicle weight rating (GVWR) exceeding 6,000 pounds.

Bonus depreciation provides an additional first-year deduction for eligible property. For assets acquired and placed in service after January 19, 2025, 100% bonus depreciation has been reinstated. This means businesses can deduct the entire cost of qualifying assets in the year they are placed into service, rather than depreciating them over several years.

Despite these accelerated depreciation methods, certain limitations apply to the depreciation of “luxury cars,” which include passenger automobiles, trucks, and vans with a GVWR of 6,000 pounds or less. These annual caps limit the amount of depreciation that can be claimed each year. For vehicles placed in service in 2025, the first-year depreciation limit, including bonus depreciation, is $20,200. If bonus depreciation is not claimed, the first-year limit is $12,200.

Only the portion of vehicle expenses attributable to business use is deductible. If an LLC-owned vehicle is used for personal purposes by the owner or an employee, this personal use is a taxable benefit. Its value must be included in the individual’s income and is subject to federal income, Medicare, and Social Security taxes.

When an LLC eventually sells a business vehicle, the transaction has tax implications based on the vehicle’s adjusted basis. The adjusted basis is the original cost of the vehicle minus any depreciation previously deducted. Any gain or loss on the sale is calculated by comparing the sale price to this adjusted basis. If the sale price exceeds the adjusted basis, the LLC recognizes a gain, which may be subject to tax. Conversely, if the sale price is less than the adjusted basis, the LLC may recognize a deductible loss.

Maintaining Proper Vehicle Records and Usage

Maintaining accurate records is fundamental for an LLC vehicle, particularly for substantiating tax deductions and ensuring compliance. Detailed mileage logs are paramount, and they should include the date of each trip, the destination, the business purpose, and the odometer readings at both the start and end of the trip. Additionally, it is advisable to record the vehicle’s odometer readings at the beginning and end of each year.

Beyond mileage, all receipts for vehicle expenses, such as fuel, maintenance, and repairs, must be retained. These records serve as evidence for the Internal Revenue Service (IRS) to verify claimed deductions. Without adequate records, the IRS may disallow deductions, leading to increased tax liabilities and potential penalties.

Clear separation of business and personal use is important for an LLC vehicle. Failure to differentiate these uses can lead to disallowed business deductions or blur legal lines between the LLC and its owner, potentially exposing the owner to personal liability. To maintain this distinction, all expenses related to the LLC vehicle should be paid using separate bank accounts or credit cards designated for the business.

Appropriate insurance coverage is necessary. Businesses should secure commercial auto insurance, as personal policies may not adequately cover business-related incidents or liability. Commercial policies address increased risks and provide greater liability protection for the LLC.

The vehicle must be properly registered and licensed in the LLC’s name with the relevant state Department of Motor Vehicles (DMV) or equivalent agency. Compliance with state and local licensing requirements is essential to avoid legal issues and ensure the vehicle can be legally operated for business purposes, including obtaining any necessary commercial tags or permits.

Establishing formal operational policies for vehicle use strengthens compliance and clarity, especially if multiple individuals will use the vehicle. A written policy can define business versus personal use, outline record-keeping expectations, and specify consequences for non-compliance. Such a policy ensures consistent adherence to guidelines and reinforces the vehicle’s role as a business asset.