Cars and Business: Basic Tax Rules
06.11.2023
06.11.2023
Many entrepreneurs employ one or more cars for their business operations. How should you properly document vehicle operating expenses in your accounting and ensure you receive tax deductions? Furthermore, what responsibilities do entrepreneurs bear when it comes to car usage in their business endeavors? These questions will be addressed in this article.
The majority of entrepreneurs utilize cars as an integral component of their business activities. Nevertheless, the utilization of a car introduces certain distinct scenarios, such as personal use or employee usage, which warrant consideration.
How can you reflect the expense of running a car in the accounting records?
A corporation that uses a vehicle has many possibilities for making claims for reimbursement of running costs:
- calculate transportation expenses at a fixed rate;
- show the actual costs of using the car.
If a company decides to count the actual costs of operating a vehicle, these include:
- fuel and overhead charges,
- insurance fees, and maintenance costs,
- the expense of repairs,
- parking fees or vignettes on the highway.
Costs also include expenses incurred as a result of legal responsibilities. For example, fees for periodic vehicle roadworthiness checks (technical inspection) or road tax. Depreciation of tangible assets is also part of the cost.
Fixed cost rate
If a business owner does not want to submit actual costs, the income tax code allows them to claim the so-called flat rate of transportation expenses.
Entrepreneurs who utilize it can claim CZK 5,000 as tax-deductible expenses for each calendar month in which they use the vehicle for business purposes. If the vehicle is only utilized for business activities in part, the flat rate must be modified, and companies can only claim expenses of CZK 4,000 every calendar month in which the vehicle is used, regardless of the proportion.
When applying a single rate of transport costs, entrepreneurs do not need to confirm the use of the vehicle with accounting documents or a log book (kniha jízd). This only relates to the Income Tax Law. However, entrepreneurs and businesses – VAT payers – must keep records of spending and business routes in order to get VAT discounts.
Vehicle Usage Reimbursement
Businesses have various options for justifying the expenses associated with vehicle usage. For instance, if an employee uses a car during a business trip or a business owner employs their personal vehicle for business purposes, they may be eligible to claim reimbursement for travel expenditures.
When a business designates a car as a company asset, it cannot seek allowances for depreciation or other related costs concerning the asset. Instead, it can seek compensation for the car’s usage, which typically comprises a basic compensation component and an allowance for fuel consumption.
The determination of the compensation amount relies on proper documentation, such as a mileage logbook (kniha jízd). The amount of compensation is computed based on the number of kilometers traveled in the course of business activities. The standards for travel reimbursement are established by the Ministry of Labor and Social Affairs through regulations, typically updated at the beginning of each year. In the event of significant fuel price fluctuations during the year, the regulations may be adjusted accordingly.
Is it necessary to maintain a logbook?
To substantiate tax deductions for fuel expenses in accordance with Article 24 (2) (k) of the Income Tax Law No. 586/1992, taxpayers are required to keep travel records as evidence of the expenses incurred in the event of an audit.
Should a company opt to declare the actual costs associated with vehicle operation, it must diligently maintain appropriate records in a journal, known as a “kniha jízd.”
The Income Tax Act stipulates that the tax deduction encompasses “expenses for business travel, including expenses for business travel of associates (section 13) and partners of the company, up to the maximum amount as per specific regulations, unless otherwise specified.”
However, the Act goes on to specify that if the vehicle is not considered part of the business’s assets, the taxpayer can apply the basic reimbursement rate, up to the maximum basic reimbursement rate established for employees, and claim expenses exclusively for the fuel consumed.
When entrepreneurs declare actual expenses related to vehicle operation, they must provide substantiating evidence for fuel costs and related expenditures and maintain detailed travel records for these expenses. Consequently, in resolution GFŘ D-22, which took effect on January 1, 2023, the tax authorities clarified the necessary content for the accounting journal.
At a minimum, the logbook must include information regarding the travel date, its purpose, and destination. Additionally, it must record the number of kilometers traveled, the mileage as of January 1 and December 31 of the calendar year, and details about the vehicle, including the license plate. The logbook must also specify whether the trip was for personal or business purposes.
Using a vehicle for non-business purposes
When an entrepreneur employs a vehicle for activities unrelated to their economic endeavors, the expenses associated with the vehicle’s operation are only partially eligible for a tax deduction. In such instances, the entrepreneur is required to prorate the costs linked to the vehicle’s usage based on the ratio of kilometers traveled for personal versus business purposes.
For instance, if an entrepreneur utilizes a car equally for personal and business use (50% each), only half of the expenses related to operating the vehicle are eligible for tax deductions. It’s important to note that this proration rule doesn’t apply to property depreciation.
Important! The Supreme Administrative Court has issued a new decision.
The Czech Republic’s Supreme Administrative Court confirmed that the taxpayer must prove the tax efficiency of fuel expenses for cars used for business trips and work equipment. To confirm, it is necessary to keep correct and reliable records of fuel consumed or link its consumption to specific expenses.
The Supreme Administrative Court (SAC) agreed that it is not enough to prove that “some” business trips took place and that the taxpayer incurred “some” expenses for the purchase of fuel (SAC Resolution No. 10-AFS 97/2022 of 31 August 2023 ).
How to get a business car
Cash Purchase
In a cash transaction, your company provides the full payment to the dealership, and the vehicle instantly becomes the company’s property. This approach allows you to claim a one-time VAT deduction at the time of purchase, granting you unrestricted use of the car thereafter. However, one drawback is that in the year of purchasing a company car, only 20% of its cost can be expensed, even though the full amount is paid.
Consumer Loan
When opting for a consumer loan, the vehicle becomes the company’s property upon acquisition, affording you full control over its use. You can still avail of a one-time VAT deduction during the purchase. Nevertheless, you will be responsible for paying the interest on the loan, which is a potential downside.
Financial Leasing
If you find yourself in need of a business vehicle but lack the available cash, leasing often presents a more convenient alternative to taking out a loan. Furthermore, it typically offers cost savings for insurance and maintenance through the leasing company.
Additionally, lease payments in this arrangement can be deducted from your taxable income. However, the advantages largely end there.
The vehicle remains the property of the leasing company until the final payment is made, requiring you to shoulder maintenance responsibilities. Moreover, the leasing company might impose restrictions on personal use or renting out the vehicle.
Operational Leasing
Operational leasing involves securing a company car with fixed monthly payments, often requiring minimal to no upfront costs. This form of leasing is currently popular among businesses, with the monthly operating lease payment being eligible for tax deductions. If you are a VAT-registered entity, you can fully deduct the VAT on the monthly payment.
Operational leasing offers a hassle-free solution, as you won’t need to worry about vehicle maintenance. Nevertheless, one downside is that the vehicle will never belong to your business. The company leasing it to you will establish the terms, which are delineated in the contract. These terms may encompass mileage restrictions, driver permissions, and other conditions.
Sources
https://www.podnikatel.cz/clanky/jak-je-to-s-autem-v-podnikani-vysvetlujeme-zakladni-pojmy/
http://www.danovetipy.cz/clanky/detail/uplatneni-pohonnych-hmot-v-zakladu-dane-152
https://portal.pohoda.cz/pro-podnikatele/uz-podnikam/kniha-jizd-versus-pausalni-vydaje-na-dopravu/
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