Company Vehicle — Tax and Expenses Guide

Who is this guide for?

If you are a Ltd. company owner, licensed business operator or self-employed professional using a vehicle for business purposes — this guide is for you. Companies that maintain employee vehicles, self-employed individuals who travel to clients, or business owners who use their personal vehicle for business — all need to know the rules.

The important point is that vehicle expenses are one of the issues the Tax Authority audits with high priority. Not because it "suspects" you, but because such expenses are easy to overstate or document incorrectly. We see this in our work with self-employed professionals and companies — simple and organized documentation saves a lot of trouble down the road.

On this page, we will go over the types of vehicle expenses that are permitted, how to document them properly, the difference between a company vehicle and a private vehicle used for business, and common mistakes we see in practice.

What are vehicle expenses and who does it apply to?

Vehicle expenses are any expense related to the use of a vehicle for business purposes. This can include fuel, insurance, repairs and maintenance, registration tax, parking, car wash, or even interest on a loan you took out to purchase the vehicle.

If you are self-employed or a business owner, any such expense can reduce your taxable income — and it directly affects the tax you will pay. In a company, vehicle expenses affect company profit, and subsequently the dividend or salary you can take.

One point that is not always clear: if you use your personal vehicle for business, that does not mean all your vehicle expenses are permitted. The Tax Authority will look for evidence that the use was for business, and what percentage of the use was business-related.

Types of Vehicle Expenses — What is Permitted and How to Document

Let's break down vehicle expenses into clear categories, because not every expense is treated in exactly the same way.

Fuel and Oil

This is the most straightforward expense. Every time you fill up with fuel, keep a receipt. If you use a credit card or your company's fuel card, it's even easier — the history is saved automatically. The trick here is to prove that the fuel was for your vehicle (not another vehicle) and that it was for business purposes. If you're a self-employed professional who travels to clients, it's easy to prove. If you travel to work from home to your own store every day, it's also clear. But if it's a shared vehicle or you use it for personal needs as well, you'll need to prove the percentage of business use.

Insurance and Registration

Vehicle insurance is a fully permitted expense if the vehicle is used for business. Your insurance invoices or receipts should be properly organized. If you use a private vehicle for business, the tax authority may require you to allocate the insurance according to usage — for example, if 60% of the use is business, then 60% of the insurance is permitted.

Registration (annual renewal) is a fully permitted expense if the vehicle is used for business. Keep the invoices.

Repairs and Maintenance

Any repair, oil change, tire replacement, car wash service — all of this is permitted. The point is that there must be a clear connection to the vehicle (not a repair of another vehicle). If you use a private vehicle, again — you'll need to prove the percentage of business use.

Depreciation (Annual Deduction)

If you purchased a vehicle for your company or as a self-employed individual, you can deduct its value gradually (depreciation) each year. This is not a direct expense, but it reduces taxable income. Depreciation is calculated according to the vehicle's age, type of vehicle (car, truck, etc.), and depreciation rules set by the tax authority. This is somewhat more complex, and it's advisable to get help from an accountant.

Interest on Vehicle Loan

If you took a bank loan to purchase a vehicle for your business, the interest is permitted as an expense. However, the loan itself is not. This means that principal repayment does not reduce income; only the interest does.

Parking and Road Tolls

Parking fees in the city, highway interchanges, or toll roads — all of this is permitted if the trip is for business. Keep receipts or invoices.

Using a Private Vehicle for Business — How Does It Work Tax-Wise?

One of the issues that raises many questions is when you use your private vehicle for business purposes. This is different from a company that purchased a new vehicle in its name.

If you are self-employed or a business owner, and your vehicle has mixed use (business and personal), the tax authorities require you to divide the expenses. The most common way is to calculate the percentage of business kilometers out of the total kilometers you drove in the year.

For example: if you drove 50,000 kilometers in a year, and 30,000 of them were for business (trips to clients, transporting goods, etc.), then 60% of your vehicle expenses are deductible. This means that if you paid 5,000 shekels per year for fuel, insurance, and maintenance, you can only deduct 3,000 shekels.

How do you prove this? The best way is to keep a record of business trips: date, destination, purpose, kilometers. This may seem cumbersome, but it is evidence that the tax authorities recognize. If you do not keep a record, you may run into problems during an inspection — the tax authorities may declare that only a small portion of the use was business-related, or reject the expense entirely.

There is a simpler way: if you can prove that the vehicle is used primarily for business (for example, you travel to clients every day), the tax authorities may agree to a higher percentage without a detailed record. However, this depends on the circumstances.

Company Vehicle — Differences and Reporting Obligations

If your company purchased a vehicle in its name (or leases a vehicle), things are somewhat different.

First, all vehicle expenses are fully deductible — there is no need to divide percentages. The vehicle is used by the company, so any expense related to it is a business expense.

Second, if the company owners or employees use the company vehicle for personal purposes (for example, driving home or on vacation), this can be a problem. The tax authorities may conclude that part of the vehicle expenses is for personal purposes, not business. The way to avoid this is to keep a record of personal trips, or to clearly define that the vehicle is used for business only.

There is another point: if an employee uses the company vehicle and has personal use, it may be considered imputed income (a benefit the employee receives). In this case, the company may need to report this benefit and deduct it from the employee's salary. This is more complicated, and it is advisable to seek advice from an accountant.

Documentation and Evidence — What the Tax Authority Expects to See

The most important point regarding vehicle expenses is documentation. The tax authority will not believe you if you say "I spent 10,000 shekels on fuel" without receipts. It will want to see invoices, insurance statements, repair invoices, and so on.

What you need to keep:

• Fuel receipts — every time you refuel. If you use a company fuel card, it's easier — there's automatic history.
• Insurance invoices — annual or monthly, depending on your insurance company.
• Repair and maintenance invoices — from a workshop or garage. It's important that there's a note about what was repaired ("oil change", "brake repair", etc.).
• Registration invoices — annual registration.
• Parking and road toll invoices — if applicable.
• Business trip log — if you use a personal vehicle. Date, destination, purpose, kilometers. This can be a simple table or a journal.

Many self-employed individuals we work with keep receipts in a folder or as photos on their phone. That's fine, but the best way is to organize them in an Excel spreadsheet or accounting software. This helps you track expenses and makes it much easier to present to an accountant or the tax authority.

Common Mistakes and How to Avoid Them

In our work with self-employed individuals and companies, we see recurring mistakes regarding vehicle expenses. Here are the most important ones:

• Not keeping receipts — this is the biggest mistake. If you don't keep a receipt for fuel or insurance, you cannot deduct the expense. The tax authority will not believe you without proof.
• Counting personal expenses as business expenses — some self-employed individuals try to deduct all vehicle expenses, including trips to and from work. This is not permitted. A trip from home to your store (or office) is a personal trip, not a business one. Only trips to clients, deliveries, or other business purposes are business-related.
• Not allocating expenses for mixed-use vehicles — if you use a personal vehicle for business, you must allocate expenses according to the percentage of business use. If you try to deduct all expenses, the tax authority may reject them.
• Forged or unclear invoices — this is rare, but it happens. If you have invoices that look strange (for example, "vehicle repair — 50 shekels" with no details), the tax authority may ask questions.
• Not reporting company vehicle personal use — if an employee uses a company vehicle for personal purposes, this must be reported. If not, it can be problematic in an audit.
• Forgetting small expenses — parking, tolls, car wash service. These are small expenses, but they add up. If you keep receipts, it's easy to include them.

What You Need to Know About Taxation and Reporting

When you report vehicle expenses, there are several important points to remember:

Self-employed individuals and holders of exempt business status and authorized status: You report vehicle expenses in your annual report to the tax authority. The report includes all income and expenses, and vehicle expenses reduce taxable income. This means that every vehicle expense you deduct also reduces the tax you pay.

Companies: Vehicle expenses reduce company profit, which affects the tax you pay. Additionally, if you plan to take dividends or salary, lower vehicle expenses mean lower profit, and consequently lower dividends.

Annual Reports: If you are a company or authorized business owner, you must file an annual report with the tax authority. In the report, you declare all vehicle expenses. This must be consistent with your receipts.

VAT: If you are subject to VAT (company or authorized business owner), you can claim VAT refunds on vehicle expenses. For example, if you purchased tires for 500 shekels (including VAT), you can claim back the VAT. This requires a receipt with VAT itemized.

Depreciation: As mentioned, if you purchased a vehicle, you can depreciate its value each year. Depreciation is calculated based on the vehicle's value, its useful life, and rules set by the tax authority. This is complex, and it is advisable to seek professional assistance here.

When Should You Consult an Accountant?

Vehicle expenses may seem straightforward, but there are several situations where professional assistance is advisable:

If you use a private vehicle for business: If you are unsure how to allocate expenses based on usage, or if you do not maintain a record of business trips, an accountant can help you establish a system that will withstand tax authority scrutiny.

If you have large vehicle expenses: If you spend substantially on vehicle expenses (for example, a self-employed individual who travels frequently), an accountant can help you ensure you are taking advantage of all permitted deductions and that you are not attempting to claim disallowed expenses.

If you are a business owner with multiple vehicles: If your company owns several vehicles or if there is mixed usage (employees using them for personal purposes), this can become complicated. An accountant can help you establish a proper documentation and reporting system.

If you are subject to a tax authority audit: If the tax authority has audited you in the past or if you are concerned about an audit, an accountant can help you prepare your documents and evidence.

If you are unsure about depreciation calculations: Depreciation is a complex calculation that depends on the vehicle type, the year of purchase, and changing regulations. An accountant can help you calculate depreciation correctly.

Practical Example — A Self-Employed Professional Using a Private Vehicle

Let's look at a concrete example. Dan is a self-employed business consultant. He uses his private vehicle to travel to clients. Last year, he paid:

• Fuel: 6,000 NIS
• Insurance: 1,500 NIS
• Repairs and maintenance: 1,200 NIS
• Collection: 400 NIS
• Parking and road tax: 300 NIS
• Total: 9,400 NIS

If Dan could deduct all 9,400 NIS, it would reduce his taxable income by 9,400 NIS. At a tax rate of 20%, this would result in savings of 1,880 NIS.

However, Dan also uses the vehicle for personal purposes. He commutes to work from home, but he also travels for weekend vacations. After calculating mileage, he found that only 70% of his trips were business-related.

This means Dan can deduct only 70% of vehicle expenses: 9,400 × 0.7 = 6,580 NIS. The tax savings amount to 6,580 × 0.2 = 1,316 NIS.

Now, if Dan had not maintained a record of business trips, the tax authority might have rejected the deduction entirely or determined that only 30% of trips were business-related. This would have significantly impacted his tax liability.