With the use of a car in business, many questions and much lack of clarity arise, both from the point of view of the accountant and the tax authorities.
Few entrepreneurs or self-employed people can nowadays do without a car as part of their business activities. With the use of a car in business, many questions and much lack of clarity arise, both from the point of view of the accountant and the tax authorities. Let us summarize them in the following article.
Using a car as a business cost
According to the Income Tax Act, any car whose initial cost exceeds CZK 80,000 must be included in the assets of a business entity. Subsequently, the value of such a car is gradually applied as a cost in the form of depreciation. The entrepreneur can choose the form of straight-line or accelerated depreciation, while the depreciation period for tax purposes is 5 years.
If the car was purchased in the period from 1 January 2020 to 31 December 2021, it is possible to apply extraordinary depreciation (as well as for other assets acquired in this period and included in the 1st or 2nd depreciation group, if the taxpayer is its first owner). It is entirely the taxpayer's choice whether to decide to use the standard method of depreciation or extraordinary depreciation; nevertheless, a suitable choice of method can bring about a significant cash-flow advantage.
Assets included in the 1st depreciation group may be depreciated on a straight-line basis over 12 months. Assets included in the 2nd depreciation group, to which a car belongs, maybe depreciated over 24 months (60% of the initial cost for the first 12 months, 40% of the initial costs for the 12 months immediately following). Extraordinary depreciation cannot be interrupted.
For accounting, a purchase price of CZK 80,000 can also be recommended as a threshold for inclusion in assets. Accounting depreciation is governed by Section 28 of the Accounting Act. The depreciation period is determined individually by the entity based on the actual use of the car. The difference between accounting and tax depreciation must be shown in the tax return. If an entrepreneur keeps tax records, he does not have to deal with this at all and will apply only tax depreciation to expenses.
Last but not least, it should be noted that a car can be depreciated only after it has been registered in the motor vehicle register and its technical certificate has been issued.
There are a number of expenses associated with the operation of a motor vehicle, such as repairs, road tax, tolls, fuel, parking, and insurance premiums. If a motor vehicle is used exclusively for business purposes, these expenses are generally tax-deductible. The situation becomes more complicated if a vehicle is not fully used to generate taxable income. Then it is necessary to reduce most expenses according to the ratio of kilometers traveled on business trips to the total number of kilometers traveled by the vehicle during the tax period. However, not all expenses need to be reduced. A typical example of an expense that does not have to be reduced is the road tax. This becomes an expense in the tax records on the day of payment, and for taxpayers who account, its accounting record will remain in the tax base regardless of whether or not it has been paid. Tolls are also not applied proportionally, at the most is excluded those that do not relate to a business trip. The procedure is similar to parking charges.
If actual car costs are low, the state allows the application of a monthly flat rate. This includes fuel and parking costs. Its monthly amount is uniformly set at CZK 5,000 per single car used for business, providing it has not been left for use by another person (the car may be provided, for example, to an employee for business trips, but not for private use). The flat rate can be used for a maximum of three vehicles. In the case of a vehicle that is only partially used to achieve taxable income, the amount of the monthly flat rate will be reduced to 80%, i.e. CZK 4,000. When using more than one vehicle, the flat rate is reduced for only one of them and is used in full for the others. It should be noted that when using the 80% flat rate, the tax depreciation of the car must also be reduced to 80%. The decision on which vehicles the taxpayer applies a monthly flat rate to and to which actual expenses cannot be changed during the tax period.
Use of a private car for business purposes
If employees use their private car for business purposes, they can charge their employer compensation for the number of kilometers traveled and compensation for fuel. The purchase price, age, or type of vehicle do not play a role in the compensation for kilometers traveled. The amount is fixed (for 2021 it is CZK 4.40/km). The amount of fuel compensation depends both on the number of kilometers traveled and the average consumption and price of fuel.
We emphasize that the procedure described above is followed only for cars that have not been included in company assets. An employee is also entitled to repayment of road tax by the employer, either according to the normal rates for each month of use of the vehicle or part thereof or at a fixed rate of CZK 25 for each day.