It’s a seller’s market for vehicles.
According to Kelley Blue Book, the average transaction price for a new vehicle was $45,031 in September, up 12.1% year-over-year. The used vehicle market might be even hotter; Charlie Chesbrough, senior economist for Cox Automotive, said that used vehicle retail prices are averaging more than $25,000 since June, up more than 25% from a year ago.
So, if you’re looking to sell a company car, you’re in the driver’s seat – pun intended.
But what if you’re looking to purchase a vehicle for business purposes? In that case, a deep understanding of the company vehicle market is necessary if you hope to acquire a business vehicle without breaking the bank. This article can help you get there.
Inventory is Way Down due to Supply Chain Shortages
You may have heard the stories about car dealerships that used to have a few hundred new cars on the lot… that now have a few dozen. The situation isn’t so dire at every dealership, but the statistics show that inventory levels are way down, on average. According to the October CarGurus Vehicle Availability Index, new inventory increased 1.1% month-over-month in October, but that was still down 71.1% year-over-year.
The reason why inventory is way down is due to shortages of essential parts – particularly semiconductors.
What is Going on with Supply Chain Shortages?
The coronavirus pandemic wreaked havoc on global supply chains. But now that we have a widely available vaccine, those shortages should be a thing of the past, right? Not exactly.
While the vaccine is widely available in the United States and other western countries, the vaccination programs in many Asian countries have been lagging. In fact, there are a lot more coronavirus cases in some Asian countries compared to the same time a year ago. Why does this matter for vehicle production? Because auto chips are produced in Asia.
The semiconductors are produced in several countries, including Malaysia, Vietnam, Taiwan, and Singapore. But here’s the problem: you only need a shortage of one kind of chip to disrupt production.
Automakers aren’t only dealing with computer chip shortages, though, as they are also dealing with shortages of wiring harnesses, plastics, and glass.
So, when will the supply chain shortages be resolved?
It’s impossible to say, but the thing is, when the supply chain shortages are resolved, new vehicle inventory won’t return to normal levels right away. According to the consulting firm Alix Partners, even if auto production immediately returned to its highest-ever level for vehicles sold in the U.S., it would take more than a year to get back to a normal 60-day supply of vehicles. Dan Hearsch, an Alix Partners managing director, said, “Under that scenario, it’s not until early 2023 before they even could overcome a backlog of sales, expected demand and build-up the inventory.” So, under an optimistic scenario, inventory would remain low and prices would remain high for all of 2022.
What is a more likely scenario?
Well, according to Ford CFO John Lawler, his company expects the chip shortage to continue into 2022, and potentially, to a far lesser extent, into 2023. In this scenario, it would be hard to see the car market normalizing before late 2023 or maybe even early 2024.
What Should Small Business Owners Do if They Need a Company Vehicle?
If you need a vehicle, you need a vehicle… regardless of the state of the global supply chain. Here are a few options to consider.
Bite the Bullet and Buy the Vehicle You Really Want
The price of new and used vehicles is much higher than they were a year ago, but if your business has been thriving, you may not have a problem with paying a premium of a few thousand dollars to get your ideal business vehicle… assuming it’s available.
Buy a Cheaper Vehicle and Upgrade When the Time is Right
If cash is a little tight at the moment, consider buying a cheaper vehicle and upgrading when the supply chain issues are resolved and prices come down to earth. By doing it this way, you won’t have to overextend yourself to buy a higher-end vehicle, freeing up cash for other parts of your business.
Lease a Vehicle
If you don’t want to pay a premium price for a new or used car, you might want to lease a business vehicle. You can lease a car for 3+ years, which should leave plenty of time for the supply chain shortages to be resolved.
How do you know if this option makes sense for you? It depends on the lease terms, as well as the price and availability of your ideal car. If the lease payments are reasonable and you expect the price of your ideal car to come down considerably over the next few years, leasing a company car may be the right decision for you.
What are the Funding Options for Business Vehicles?
So, you’re ready to purchase a vehicle to satisfy your business needs, but you don’t know how to fund the purchase. Here are a few options to consider:
- Savings: do you have enough cash in your business bank account to fund the purchase of a company vehicle? If so, you may want to do an all-cash deal for a business car. But, even if you have the cash, this isn’t necessarily the best option for your small business. You have to consider the opportunity cost of the money; if you have a prospective investment that you expect to return much more than the interest rate on the loan for the car, for example, you may want to use the cash for that investment and finance the car.
- Business equipment financing: equipment financing is a small business loan that can be used to purchase different types of business equipment, including vehicles. To evaluate applications for equipment financing, lenders consider the business owner’s personal credit score, length of time in business, repayment history, and company cash flow. The advantages of equipment financing are the ability to finance up to 100% of the value of the vehicle and a fast and easy application process. The disadvantages are that the loan term may outlast the equipment’s useful life and there may be unfavorable tax consequences via limited deductibility
- Car loan: one of the most popular financing options for a car is a car loan. You can get a car loan through a bank, credit union, online lender, or car dealership. According to Edmunds, the average car loan down payment was 11.7% in 2019. So, if you want to finance the entire purchase price, business equipment financing may be the better option. That said, in exchange for a lower down payment, you may have to make higher monthly payments.
What are the Tax Advantages of a Business Vehicle?
Since a car is a depreciating asset, the IRS allows small business owners to write off the costs of their vehicles. That said, you have to keep meticulous records, keeping track of your car-related expenses, as well as how many miles driven are for personal use vs. business use.
There are guidelines on what qualifies for business use vs. personal use. For example, meeting with your Certified Public Accountant (CPA) about business would count for business use. But if you met your CPA about a matter unrelated to your business, it would count as personal use.
So, how do you figure out your expenses for business use?
You start by dividing your miles driven for business use by your total miles driven. Let’s say you drive 8,000 total miles and half of those miles are for business purposes, giving you 4,000 miles for business purposes.
From there, you can choose between two methods to calculate your business expenses: the actual expenses method or the standard mileage method.
Actual Expenses Method
With the actual expenses method, you start by taking your vehicle expenses, including gas, oil changes, tire purchases, car washes, auto insurance, and vehicle depreciation. Let’s stick with the previous example, where the business use worked out to 50% of the total miles driven. If all of your expenses totaled $8,000, your deduction would work out to $4,000 (.50*8,000).
Standard Mileage Method
With the standard mileage method, you still have to track your miles driven for business purposes. But your actual expenses no longer have an impact on your deduction. Instead, you use the standard mileage rate provided by the IRS: that rate was set at 56 cents in 2021. So, in the above example, those 4,000 miles driven would give you a deduction of $2,240 (.56*4,000).
When Should You Use Each Method?
In the above example, the actual expenses method gave you a higher deduction than the standard mileage method. But that isn’t always the case. So, what determines which method provides a higher deduction?
It depends on a number of factors. Here are a few of them:
- Fuel economy: if your vehicle is a gas guzzler, the actual expenses method is likely preferable, all other things being equal. If you have a fuel-efficient car, you could give a point to the standard mileage method.
- Maintenance costs: are you spending a lot of money repairing your car? If so, the actual expenses may come in higher than the standard mileage rate.
- Auto insurance: in some cases, it is very expensive to insure a car. For business owners who are paying sky-high insurance premiums, the actual expenses could be on the higher end.
The good news is that you don’t have to pick a method at the beginning of the year. You can track all of your expenses over the course of the year, and use whichever method gives you a higher deduction.
The Bottom Line
The coronavirus pandemic has caused several disruptions across the economy, with new vehicle production being one of the biggest issues for consumers. As a small business owner, it’s important to take the long view, considering the most efficient way to meet your business needs.
Through Biz2Credit, you can get funding that is designed to match your small business’s needs in an ever-changing economic landscape.