How To Account for Car Expenses and Reflect Personal Use
If you are a small business or self employed, you are generally able to reflect your car costs as an expense on your profit and loss as well as write off the portion of the expenses that relate to business on your tax return. And while you are not able to deduct the full amount of the purchase of a car as an expense, all at one, you can “write off” or expense a portion of it every year which is referred to as the depreciation.
What Are The Types of Car Expenses
The most common types of car expenses include:
Gas
Insurance
Licence
Registration
Repairs and maintenance (fixing your car, car washes, changing summer or winter tires, oil changes etc.)
Parking
What is the Accounting Treatment of Car Expenses
Chart of Accounts for Car Expenses
If you use your car for business and are not using the per KM method allowed by Revenue Canada (CRA) to corporation employees (including owners), then you would want to track car expenses more granularly to see what you have spent in the current period and to compare with prior periods.
You would set up your chart of accounts with Car Expenses (or Vehicle or Automobile Expenses) as the Master account.
You would then set up sub categories for each of the specific expenses listed above such as gas, insurance, repairs etc.
How to Enter Car Expense Transactions
If you use your business bank or credit card account for your car expenses, you can simply enter them as expenses, as they occur or you can create a bill.
If you are using a software such as QuickBooks Online or Xero, you would enter them from the banking download or you would “create a bill” and then match the payment to the bill.
You would choose the relevant account that you have set up per the step above.
GST/HST and/or QST should be included where applicable on the bill or the expense.
How to Record the Purchase of Car
The purchase of a car is a capital asset which means that it cannot be immediately expensed. Instead it must be depreciated over time. To reflect the treatment of a car expense as an asset, it must be added to as a fixed (or capital) asset on your balance sheet under the category of property, plant and equipment.
The acounts to be added to your chart of accounts are:
Car or Vehicle (the name of the car can be descriptive) in Property, Plant and Equipment
Accumulated depreciation as a contra account (negative asset) in Property, Plant and Equipment
Depreciation expense as an operating expense in your profit and loss
Journal Entry for Purchase of Car
For example if you purchase a car for $35,000 for which the down payment is $10,000 and the loan or financed amount is $25,000 the journal entry would be as follows:
Debit: Car $35,000
Credit: Bank $10,000 (down payment)
Credit: Loan payable car (or vehicle) $25,000
Journal Entry for Depreciation of Car
Assuming the depreciation of the car is 30%, which is $10,500, the journal entry at the end of year 1 would be:
Debit: Car depreciation expense $10,500
Credit: Accumulated deprecation - car $10,500
Note that there are special tax rules relating to capital cost allowance for cars, which is the same concept as depreciation.
A tutorial on how to enter car expenses and enter the personal use journal entry
How to Enter Personal Use of Car Expenses
Once you have entered the expenses, you can make a year end adjustment or a monthly adjustment to reflect the personal portion of car expenses i.e. the non business portion.
Note that this entry for the personal portion of car expenses only needs to be made if you are an unincorporated sole proprietorship/self employed OR if you reimburse yourself or employees, from the corporation, for specific costs. This makes preparation of the T2125 form for unincorporated small businesses much easier
Determine Kilometres Driven for Business vs Personal
Before making the journal entry, you would calculate how much of the car usage was for business vs personal by calculating the odometer reading at the beginning of the year and at the end of the year.
You should also keep a log of kilometres driven for business purposes that includes a description, date of travel and number of kilometres.
You would then divide the kms driven for business over the total kms driven to arrive at a percentage of business kms driven.
Calculate transactions with and without GST/HST (and QST)
The next step is to sum up the total of transactions with GST/HST and the total of transactions without GST/HST. This is because the GST/HST and QST on the personal portion of the car expenses is not claimable as an input tax credit on your return and therefore has to be reduced.
Create the Journal Entry for the Personal Portion of the Car Expense
First create a new account called “Personal Portion” (or something similar) and make it a sub account of car expenses
For this example, let’s assume that the personal portion of the car expenses for the year were:
$1,000 of expenses on which sales tax was claimed (this amount is before sales tax)
$500 of expenses on which sales tax was not claimed
Sales tax rate for Ontario is 13%
Then, create a journal entry in whatever accounting software you are using that would be as follows:
Credit: Personal Portion $1,000 + $130 sales tax (in QBO or Xero you would simply select the HST Ontario tax code)
Credit: Personal Portion $500
Debit: Owner’s equity (if unincorporated) or Shareholder loan (if incorporated) $1,630
Note that in a corporation, this amount would have to be reimbursed by owner or employee or declared as a dividend on a T5 Slip to the owner.
Alternatively, you can declare it as a taxable benefit on the employee’s T4 in which case this entry is not necessary. You would follow the method for reflecting a car taxable benefit.
You can also check out my video tutorial on how to account for car expenses
Interested in Learning More About Accounting, Finance, or Canadian Tax? Check out my books for small business. If you are interested in more personalized guidance, I also offer small business consultations where I address your specific questions and provide insights that are customized to your situation.
