||Ask the Small Biz Adviser
or business vehicle?
Dear Small Biz
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.
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.
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
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
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.
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
I wish you well.
-- Posted: Oct. 22, 2002