A car is a basic work tool for many entrepreneurs. Therefore, the decision on how to finance it for your business has huge tax consequences. Furthermore, we will compare the three most popular ways to use a car in a sole proprietorship: leasing, a loan, and using a private vehicle. We will analyze them step by step and explain the different rules for deducting costs, PIT, and VAT to help you choose the most financially beneficial solution.

Key VAT Rules for a Car in a Sole Proprietorship

Regardless of the financing method, as an active VAT payer, you must know this basic deduction rule:

• 50% VAT Deduction: Primarily, this is the standard, most commonly used option. It allows you to deduct half of the VAT from all car-related expenses (purchase, fuel, service) if the car is used for mixed purposes (business and private).
• 100% VAT Deduction: On the other hand, this is only possible if the car is used exclusively for business activities. Moreover, this requires keeping a detailed vehicle logbook (a “mileage log”) and registering the car with the tax office.

It’s also worth remembering that the non-deducted part of the VAT (the remaining 50%) becomes your tax-deductible cost, which lowers your income tax!

Option 1: Using a Private Car for Business

Using a private car is the simplest way to have a car in a sole proprietorship. This is an ideal solution for people who use their car for business purposes sporadically.

• How it works: You don’t add the car to your company’s fixed asset register. Simply put, you use your personal car for business trips.
• What costs can you deduct?
  • Income Tax (PIT): You can include 20% of the value of operating expenses (fuel, repairs, insurance, inspections) as a tax-deductible cost.
  • VAT: You have the right to deduct 50% of the VAT from operating expenses, but only from that 20% portion of the expense. As a result, this is a very small amount.
• Pros: Of course, minimal formalities and no need for complex record-keeping.
• Cons: Unfortunately, very low deductions. Only 20% of your expenses lower your tax.
• Who is it for? For entrepreneurs who rarely drive for business matters.

Option 2: Buying with Cash or a Loan (Car as a Fixed Asset)

By deciding to purchase, you add the car to your company’s assets as a fixed asset.

• How it works: You become the owner of the vehicle. However, if you finance it with a loan, the principal installments are not a cost, but the interest on the loan is.
• What costs can you deduct?
  • Depreciation: The cost is the gradual “wear and tear” of the car through depreciation write-offs. It should be noted that the depreciation limit for passenger cars is 150,000 PLN (approx. €35,000).
  • Operating Expenses (PIT): You can claim 75% of expenses (fuel, service, insurance) as a cost if you use the car for mixed purposes.
  • VAT: From the purchase and operating expenses, you deduct 50% (mixed-use) or 100% (business-use only).
• Pros: You own the vehicle, and you also have high cost deductions.
• Cons: Above all, you freeze a large amount of cash and must handle complex depreciation accounting.
• Who is it for? For companies that want to own their car.

Option 3: Operating Lease – The Most Popular Choice

This is currently the most popular way to finance a car in a sole proprietorship.

• How it works: You “rent” the car from a leasing company for a specified period, paying monthly installments. Subsequently, after the contract ends, you can buy the car.
• What costs can you deduct?
  • Initial Payment and Lease Installments (PIT): The entire initial payment and each monthly net installment are your tax-deductible costs. However, a limit of 150,000 PLN of the car’s value applies here.
  • Operating Expenses (PIT): Just like with a purchase, 75% of costs for mixed-use.
  • VAT: From the initial payment, each installment, and operating expenses, you deduct 50% or 100%.
• Pros: Low initial capital investment, plus predictable installments and simple accounting rules.
• Cons: You are not the owner of the vehicle during the lease term.
• Who is it for? For almost any company. Undoubtedly, this is the most tax-optimal form of financing.

Car in a Sole Proprietorship

Summary: Which Option is Best for Your Car in a Sole Proprietorship?

So, which option for a car in a sole proprietorship is the best? There is no single answer, but a few general rules can be applied:

• Firstly, do you use the car very rarely? In that case, choose to account for a private car.
• Secondly, do you want to be the owner and have the cash? Then consider a purchase.
• Finally, do you want to optimize taxes and not freeze your cash? Therefore, choose an operating lease.

Ultimately, before making a final decision, it’s always wise to consult your accountant to analyze your individual situation.

In the next article, you’ll find out what type of contract to choose for an employee.