- advertisement -

Steve Windhaus Ask the Small Biz Adviser

Personal or business vehicle?

Dear Small Biz Adviser:
I, along with a partner, am starting an air conditioning company as an S corporation. We each have one vehicle that will be for business use only. Should we start the company with these as assets by putting them in the company name or should the company lease these from us? Thanks for your help.
Dianna

Dear Dianna:
I have some distinct reservations about the matter of leasing the personal vehicles to the company. I can think of only two significant reasons for taking such an action:

1. It adds to the asset base and corresponding net worth of the company.

2. It results in a form of compensation to you and your partner, apart from wages or salaries.

- advertisement -

Frankly, given that this is a startup company, you need to be sensitive to the matters of compensation. That becomes a very delicate issue if you are preparing to seek capital in the form of a commercial bank loan or venture capital for this venture.

Bankers and, with increasing awareness, venture capitalists do not like the idea of financing the ownership's compensation at the outset. Commercial lenders seek a policy of deferred compensation. In other words, the ownership defers wage or salary compensation until such time as the startup begins to develop consistent, monthly, positive cash flow. The monthly revenues need to reach a level that they begin to exceed monthly cash disbursements on a regular basis. Ideally, this will produce a buildup of cash reserves to equal three to four months of expenses so that you will be able to address financial emergencies if and when they arise.

Other auto issues
You also need to consider other issues related to the vehicles that could have positive or negative impacts on the company.

Depreciation is a key factor. Automobiles depreciate over a period of five years. That allows you to deduct depreciation expenses from sales, resulting in reduced net profit exposure to income taxes, assuming you convert full ownership of them to the company.

If you lease or convert ownership of the vehicles to the company, the onus is shifted to your venture to generate enough revenue to cover any personal loans you may have on the vehicles. As company owner, do you want to burden your new venture with that?

To lease the vehicles to the company, you must retain full ownership, which means you own the vehicles outright. Therefore, there would be an obligation to pay off any debt. Furthermore, if you have any outstanding indebtedness on the vehicles, the lien holder must approve the transfer of the lease or ownership to the company. Being a startup, I suspect you may encounter some difficulty.

Converting ownership of the vehicle to the company will result in equity investment on the part of you and your partner. The monetary equivalent of your investment would be based on the present market value of the specific vehicles, according to reliable sources such as Kelley Blue Book.

If you opt to retain ownership of your vehicle but use it in the conduct of business, it is imperative to maintain a daily log of car use for reimbursement of business expenses from the company. Presently, there are two options for mileage rates. You can charge 36.5 cents per mile for 2002 business use (dropping to 36 cents per mile on Jan. 1, 2003) or track actual costs, which can demand more bookkeeping on your part for all expenses incurred on the vehicle. This leads to an average vehicle cost per mile.

Travel use of the vehicle for company expenses is allowed in certain circumstances. This includes travel between your company and another company, customer or client; travel from one company, customer or client to another; or travel from your office to conduct business activities such as picking up supplies, going to the post office to deliver or pick up company mail and making company bank deposits and other business-related activities.

Review Internal Revenue Service Publication 463, Travel, Entertainment, Gift & Car Expenses, for more detail on these allowable expenditures.

In short, you need to consider all ramifications of leasing, converting ownership or retaining personal ownership while using the vehicle for business use. There are advantages and disadvantages to each.

I wish you well.

-- Posted: Oct. 22, 2002

Read more Small Biz Adviser columns
Looking for more stories like this? We'll send them directly to you!
Bankrate.com's corrections policy
top of page
See Also
Business use of your car may be deductible
10 business equipment leasing goofs to avoid

Key auto leasing questions

Small-business economic indicators
Small-business glossary
More Small Biz stories
Print  
 

30 yr fixed mtg 3.95%
48 month new car loan 3.22%
1 yr CD 0.71%
Alerts


Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
VIEW MORE CALCULATORS

BASICS SERIES
Begin with personal finance fundamentals:
Auto Loans
Checking
Credit Cards
Debt Consolidation
Insurance
Investing
Home Equity
Mortgages
Student Loans
Taxes
Retirement

MORE ON BANKRATE
Ask the experts  
Frugal $ense contest  
Quizzes  
Form Letters


- advertisement -
 
- advertisement -