With the right strategy, you can reduce the tax on privately driven company cars. An attractive special rule, however, is on the brink.
For a long time, the self-employed with simplified bookkeeping, the revenue surplus account, used a special tax-saving model for privately driven company cars. They used leasing the cars in such a way that they benefited as best as possible from several tax rules.
But the days of this strategy now seem to be numbered, as we reported in the current issue of our “Law and Taxes” newsletter, which you can subscribe to here. This is about the core of the strategy: a special leasing payment, also known as an advance payment, right at the start of the contract. With this one-off payment of often over 50,000 euros, the self-employed have significantly reduced the ongoing leasing rates during the contract period.
What is now disputed is how the leasing advance payment is taken into account for tax purposes – directly at the time of payment or over the entire term of the leasing contract? This is particularly important when taxing the private use of company cars.
As a reminder: The benefit from the private use of company cars is taxable. As soon as company cars are used for more than 50 percent, the tax is calculated either according to the one percent or the logbook method. The one-percent method cannot be selected for company journeys between 10 and 50 percent, because in this case the car is not part of the necessary business assets. Every trip must be recorded in a logbook and the costs incurred on private trips are taxable for company cars that are mainly used for business purposes.
With the one percent method, one percent of the gross list new price is taxable every month. For commuters, 0.03 percent per kilometer of the one-way distance to work is added. A special rule – called a cost cap – limits the flat-rate tax burden. If the total costs actually incurred for the company car are below the flat rate, then only the total costs have to be taxed, the Federal Ministry of Finance made it clear in 2009 (S 2177/07/10004).
Dispute about the cost cap
Therefore, the self-employed could tactically use the special leasing payment. Because the ongoing leasing installments, which were strongly depressed by the special payment, fell below the flat tax rate according to the one-percent method. This meant that only the actual costs were taxable, i.e. the current leasing installments and other costs associated with the use of the car.
However, tax authorities and finance judges no longer play their part: In principle, special leasing payments are permissible and are recognized as operating expenses in the year of payment. The tax authorities want to proceed differently with the tax on private trips. For the limitation according to the cost cap, they want to distribute the special payment over the entire term of the leasing contract. Then, however, the advantage of the low ongoing leasing payment no longer has an effect because the arithmetical total costs – i.e. the sum of the allocated special payment and the current leasing rate – are usually no longer lower than the flat-rate value according to the Percent method are.
The first tax courts have accepted this procedure of the tax offices: The cost cap is only an equity regulation that is supposed to avoid tax hardship. Tax offices could distribute the special leasing payment over the term of the contract.
The final decision still has to be made by the Federal Fiscal Court. Proceedings are already pending (VIII R 11/20). In another case, no revision was allowed. The appeal against it was granted (VIII B 31/20). The final file number of this revision procedure is not yet available. Affected parties can object to their tax assessment and request the suspension of the proceedings with reference to the outstanding rulings.
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Company car: This rule of thumb helps employees
The situation is usually easier for employees. They too have to tax the benefit from private use of their company car as a monetary benefit. The employer takes care of that. A logbook is worthwhile if the private share of the journey is relatively small.
Rule of thumb: From around 30 percent private usage, the all-inclusive one percent method is more attractive. If you have a lower private share, you usually have to pay less tax with the logbook. Before the start of the year, employees should best agree the desired tax method, i.e. one percent method or logbook, with their employer. A change is still possible for the later tax return if the other procedure then proves to be more favorable. Of course, you can only switch from the one percent method to the logbook if one has been kept.
In many cases, logbooks are not kept properly. Timely records of:
– Date and mileage at the beginning and at the end of each trip
– In the case of business trips, the travel destination and the purpose of the trip
– a corresponding note for private trips
– also when traveling between home and work
The tax office quickly assumes private use of the company car, even if this may not be planned in individual cases. If private use is expressly prohibited, the tax office may not simply assume private use even without a logbook, even if the employer does not monitor the prohibition (BFH, VI R 42/12). However, if there is no ban on private use, then tax will usually apply. The mere reference to non-private use, for example because of having your own privately used car, is not sufficient evidence to the contrary. The theoretical possibility of private use is sufficient for tax liability (BFH, VI R 49/11 and 31/10).
If the one percent method is used, then – as already mentioned – a surcharge must be paid for trips to work. It is practically a correction item because employees with a company car can still deduct the tax-based distance allowance as income-related expenses. The surcharge is calculated using a flat rate of 0.03 percent per kilometer of distance between home and workplace. This value of 0.03 percent is based on an assumed 15 working days per month, 180 per year.
In corona times, however, some company car drivers could drive to work less often. In this case, the Federal Fiscal Court stipulated that only the actual journeys had to be included if the number of journeys to work was lower (VI R 57/09). That is then 0.002 percent of the gross list price per day and kilometer. If employees make fewer than 180 trips to work a year, they should consider switching to the 0.002 percent method. This can also be done either in advance for the whole year (for this the employer needs a list of the travel days every month) or afterwards, as part of the tax return. Employees then provide the tax office with proof that the employer has used the 0.03 percent method and submit a list of all the days of travel in the year.
Save taxes with the e-company car
Generally less tax is due for e-cars than company cars. In the case of first-time leasing from the beginning of 2019, only a quarter of the gross list price for taxation according to the one percent method (and for the surcharge for trips between home and work) has been applied since the beginning of 2020. This applies to cars with a gross list price of up to 60,000 euros. The regulation originally limited to the end of 2021 has now been extended to the end of 2030.
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