IF you are a business owner, then you may benefit by registering your new car in your firm’s name.
This blog post has been inspired by one of the cases that I dealt with on Car Finance.
A borrower who holds a good Cash Credit limit with us came to me. He has been mentioning about upgrading his car for some time now. However, the talks never got the serious level of really working on the project.
But today he was damn serious about his plans. He had come prepared to talk to me about his new car buying plan. I was busy with some customers. He waited for me to get free. I realized that he was up to something today.
Ok, so when we started talking, the matter came up. He was interested in get finance for his car. But, he was interested in getting the car in the name of his firm. Moreover, he was a cash rich guy. So, it made me wonder why would he go for a car finance when he can buy it all in hard cash.
Well, the answer to this question lies in the fact that a car is an asset to a company. And every asset that a company or a firm has carries a value in depreciation.
So, when you finance a car for your firm, you enjoy the benefit of depreciation on your car. As you are the proprietor of the firm, you are using the car. And no one else is using it. So, it hardly matters if the car is in your name or in the name of the firm.
But you can get a lot many benefits on paper for yourself. And save on your income tax.
So, let me explain this to you in detail.
What is Depreciation?
Every asset carries a value and has a shelf life. It means that the asset decreases in it’s value over time. This diminishing value of an asset in economic terms is called depreciation.
And each type of asset is assigned a life. Say, a car has a shelf life of 7 years. It would mean that you can calculate the value of the car in such a way that the car is diminishing in vale by some margins every years.
There are different ways to calculate the depreciation. One simple method used for calculating depreciation is straight line method. In straight line method, the total value of the asset is divided by the total number of life years for the asset.
So, for example in this case of a car, you may say that the value of car is 10 lacs and it has a life of 7 years. Using the straight line method, we would dividde 10 lacs by 7 years.
Whatever the value comes will be the value of depreciation. Now, this depreciation value will be treated as expense on the part of the company. This basically means that this amount will not be considered for taxation. You will therefore be not required to pay any taxes on the amount.
The second benefit is of the interest. Had you purchased the car in cash, you may have difficulty in filing your tax returns. With a finance on the car, the income tax also waives the interest that you pay on the car loan.
And at the same time, you are able to show your income and get the waiver at the same time. So, there are two BIG benefits of car finance in the name of firm if you are a business owner.
- Depreciation
- Waiver of income tax on the interest paid to the car financing company/bank
