What Happens When My Business Buys My Car?

Transferring a personal vehicle to your business is a formal financial transaction that requires careful navigation of tax and legal frameworks. While business owners can sell their personal car to their company, the process extends beyond a simple exchange of keys and cash. It establishes the vehicle as a business asset, which changes how its expenses and value are treated for tax purposes.

This transaction must be structured correctly to satisfy regulatory requirements and accurately reflect the change in ownership. The implications affect both the individual owner and the business entity, influencing personal tax liability and the company’s ability to claim deductions.

Structuring the Sale to Your Business

When a business owner sells a personal asset to their company, the transaction must be handled as an “arm’s length transaction.” This means the sale should be conducted as if the two parties were unrelated, ensuring the terms are fair and not designed to manipulate tax outcomes. The primary element is selling the vehicle for its Fair Market Value (FMV), which is the price a willing buyer would pay a willing seller. Setting a price significantly above or below FMV can attract IRS scrutiny and may be reclassified as a disguised dividend, distribution, or capital contribution.

The most common methods for determining FMV involve using established third-party valuation services like Kelley Blue Book (KBB) or Edmunds. These resources provide detailed valuation reports based on the vehicle’s make, model, year, mileage, and condition. For unique or heavily modified vehicles, a formal appraisal from a certified professional may be more appropriate.

A formal bill of sale is required to document the transaction. This document must include the date of the sale, purchase price, the vehicle’s make, model, year, Vehicle Identification Number (VIN), and signatures of both the seller and a business representative.

Following the bill of sale, the vehicle’s title must be officially transferred to the business’s name through the state’s department of motor vehicles. Keeping copies of the valuation report, bill of sale, and new title in the business’s records is important.

Tax Consequences for the Individual Seller

The tax impact on the individual selling the car depends on the relationship between the sale price and the car’s adjusted basis. The adjusted basis for a personal-use vehicle is its original purchase price. If the vehicle was ever used for business purposes before the sale, its basis would be reduced by any depreciation claimed during that period.

A taxable gain occurs if the vehicle is sold to the business for an amount greater than the individual’s adjusted basis. Since personal vehicles are capital assets, this gain is reported as a capital gain on the individual’s tax return. For example, if a car was purchased for $30,000 and sold to the business for its current FMV of $32,000, the $2,000 difference would be a taxable capital gain.

It is more common for a personal vehicle to be sold for less than its original purchase price due to depreciation. When the sale price is less than the adjusted basis, a loss occurs. However, losses on the sale of personal-use property are not tax-deductible for the individual. If a car was bought for $40,000 and later sold to the business for its FMV of $25,000, the $15,000 loss cannot be used to offset other income on the individual’s tax return.

Tax Deductions for the Business

Once the business acquires the vehicle at its Fair Market Value, that price becomes the business’s basis in the asset. This basis is the starting point for claiming tax deductions, the most significant of which is depreciation. Depreciation allows the business to recover the cost of the vehicle over time as it is used to generate income. The vehicle must be used more than 50% for business purposes to qualify for most depreciation methods.

The Modified Accelerated Cost Recovery System (MACRS) is the standard method, allowing the cost of the car to be depreciated over a five-year period. Alternatively, a business may use Section 179 expensing, which permits the immediate deduction of all or part of the vehicle’s cost in the year it is placed in service, subject to an annual limit. Bonus depreciation is another accelerated method, but its benefit is decreasing. For vehicles placed in service in 2025, the bonus depreciation rate is 40%, and this rate is scheduled to fall to 20% in 2026 before being eliminated.

These depreciation deductions are subject to “luxury auto depreciation limits” imposed by the IRS on passenger vehicles, which restrict the amount of depreciation that can be claimed each year. Vehicles with a Gross Vehicle Weight Rating (GVWR) over 6,000 pounds, such as many large SUVs and trucks, are not constrained by the standard luxury auto limits and are eligible for a much higher Section 179 deduction.

Beyond depreciation, the business can deduct the actual operating expenses associated with the vehicle’s business use. These costs include fuel, oil, repairs, maintenance, tires, registration fees, and insurance.

Ongoing Compliance for Company Vehicle Use

The business must maintain detailed record-keeping to distinguish between business and personal use of the vehicle. The IRS requires a contemporaneous mileage log, meaning records must be kept at or near the time the miles are driven. This log should detail the date of each trip, the destination, the business purpose, and the starting and ending odometer readings.

Without a detailed log, the IRS can disallow vehicle expense deductions during an audit. This documentation is the method for substantiating the business-use percentage, which is applied to all vehicle expenses to determine the deductible amount.

Any personal use of a company-owned vehicle by an owner-employee constitutes a taxable non-cash fringe benefit. The value of this personal use must be calculated and included in the employee’s gross income on their Form W-2. The IRS provides several methods for valuing this benefit, with the most common being the annual lease value rule and the cents-per-mile rule.

The annual lease value method uses an IRS table based on the car’s FMV, which is then multiplied by the percentage of personal miles driven. The cents-per-mile method calculates the benefit by multiplying personal miles by the standard business mileage rate. This calculated fringe benefit is subject to federal income tax withholding and payroll taxes.

Finally, the vehicle must be insured with a commercial auto policy. Personal auto insurance policies do not cover vehicles owned by a business entity, and failing to secure proper coverage can create significant liability risks.