Thanks to aipb.org here is useful information about company car writeoffs.
A sole proprietorship–an unincorporated company with one owner–can depreciate a vehicle as though it were used 100% for business even when employees drive company vehicles for personal use under the same conditions, provided that:
1. the employer has a business reason for providing the vehicle, such as for business travel or as part of the employee’s compensation as a perk for the job; and
2. the employer reports the value of the employee’s personal use as taxable income on the employee’s W-2.
But when the sole proprietor drives the car for personal use, there are different rules.
Sole proprietors do not file a W-2 for themselves, so their personal use of their own car is not taxable income. However, they are allowed to depreciate the vehicle only in proportion to their business usage. For example, a sole proprietor who drives his or her own vehicle 68% for business can depreciate only 68% of the vehicle’s cost basis for tax purposes.
Example 1: Sole proprietor Rosa has a pickup and a car. She lets employee Jane use the pickup for business, and Rosa uses the car. Mileage records show that Rosa and Jane both drove the vehicles 80% for business and 20% for personal use.
· If Rosa’s company reports the value of Jane’s 20% personal use of the pickup as taxable income on Jane’s W-2, 100% of the pickup’s cost basis can be depreciated.
· Rosa does not report her 20% personal use of her own car as taxable income. Instead, she must limit her depreciation of the vehicle to 80% of the cost basis (because she used the car 80% for business). Example: If Rosa’s car has a cost basis of $20,000, she can depreciate only $16,000 ($20,000 cost basis x 80% business use). Her deduction of other vehicle costs (gas, repairs, oil, etc.) is also limited to 80%–the business use portion.
When a sole proprietor drives the car for both personal and business use, the IRS auto limit is also reduced by the personal use.
Example 2: In 2006, sole proprietor Rosa purchases a car for $24,000. Mileage records indicate that Rosa drives her car 75% for business use and 25% for personal use. Rosa’s cost basis is $18,000 ($24,000 original cost basis x 75% business use). What is Rosa’s maximum depreciation deduction for the auto on her 2006 tax return?
To compute: $18,000 cost basis x 20% Table 1 rate for Year 1 = $3,600 Year 1 depreciation. However, Rosa’s maximum deduction, based on the IRS limit for a car purchased in 2006, is $2,220 ($2,960 x 75% business use). Rosa’s maximum depreciation deduction for the auto on her 2006 tax return is $2,220.
The depreciation schedule for a sole proprietor passenger auto driven partly for personal use is complicated; a CPA should be consulted.
Sole proprietors who use the company car do not have to include the value of their own personal use in their taxable income, but they must limit depreciation to the portion of the cost basis proportional to the business use of the vehicle. However, if a sole proprietor’s employees drive the company car, their personal use is reported as personal income on their W-2, and the sole proprietor depreciates the full cost basis of the auto.