Do you operate your business as an S or C corporation?
Do you drive for corporate business a vehicle titled in your personal name?
If the vehicle is in your personal name, how do you avoid losing some or all your business-use vehicle deductions?
By claiming the business-use deductions on this vehicle the wrong way, you can lose all your vehicle deductions to the alternative minimum tax (AMT). If you are not subject to the AMT and you claim the business use of the vehicle on your personal tax return, you will lose at least some and perhaps all your business-use vehicle deductions. On the other hand, by deducting that personal vehicle the best way, you realize the tax benefits of all your rightful business deductions including, when applicable, Section 179 expensing and bonus depreciation.
In this article, you learn not only how best to claim tax deductions on the personal vehicle that you use for corporate business, but also how to treat the vehicle deductions on your corporate and personal tax returns. Before we look at what you need to do, let’s see what’s at stake.
Example of Section 179 Expensing
Let’s say you bought a used $25,000 SUV with a gross vehicle weight rating (GVWR) of 6,550 pounds that you use 100 percent for business. Under the actual expense vehicle-deduction method, tax law gives you two choices for deducting the $25,000 cost of the vehicle:
- A little bit each year. The usual depreciation schedule for a more-than-6,000-pound GVWR SUV spreads the $25,000 depreciation deduction over a period of six years (IRC Sections 280F(d)(5); Rev. Proc. 87-57).
- All at once. You can use Section 179 to deduct the entire $25,000 in the year you purchase this used SUV and begin to use it in your business (IRC Section 179(b)(5)).
Note. You may not use Section 179 expensing or depreciation when you deduct your vehicle using IRS mileage rates
Section 179 speeds up the normal depreciation process. Instead of spreading the deductions over six years, you deduct the full $25,000 up front.
Note. You also deduct the costs of gas, repairs, and other operating expenses in addition to the $25,000.
Example of Combined Section 179 Expensing and Bonus Depreciation
Now let’s say you bought a new $50,000 SUV that you use 100 percent for business. You can take
- $25,000in Section 179 deductions,
- $12,500in bonus depreciation deductions, and
- $2,500in MACRS (regular depreciation) deductions.
This creates a total first-year deduction of $40,000, all of which is reimbursable through the corporation.
Title to You, Expense to the Corporation
You may have started a new corporation, and that’s why the vehicle title is in your name. Or perhaps you already operate as a corporation but face a situation where it’s better to buy an asset in your personal name rather than in the corporate name. This could be because of legal issues, financing terms, insurance rates, or any number of other reasons.
If title is in your name, can you still use Section 179 to deduct the cost of the asset?
Absolutely—but you need to do this the right way.
With title in your personal name and use for the corporate business, you can deduct the business use of your vehicle using IRS Form 2106 for unreimbursed employee expenses and claiming the deductions as miscellaneous
itemized deductions. There are three possible problems with this treatment:
- You receive no deduction at all because the alternative minimum tax disallows all miscellaneous itemized (This is outrageous, but that’s the way it is.)
- You receive no deduction because you don’t itemize your
- You receive a reduced deduction because you lose 2 percent of your miscellaneous itemized deductions to the adjusted gross income
By doing this the wrong way, you are going to lose. It’s just a question of how much (all or some of the vehicle deductions).
To achieve the full deduction for the vehicle, you want the corporation to reimburse you for the vehicle expenses. This is true regardless of your method of deduction (mileage rates or actual expenses). When the corporation reimburses you, all of the business expenses and deductions move to the corporate return. You have the money in your pocket as a non-taxable reimbursed employee expense, and the corporation has the deductions. If you operate your business as an S corporation, then the expenses and deductions pass through to you as the sole shareholder of the corporation.
Reimbursements from the Corporation
A corporation can reimburse an employee for all expenses allowable under Sections 161 to 199 of the tax code—which includes Section 179 expensing and bonus depreciation (Reg. Section 1.62-2(d)(1)).
Here’s what happens when your corporation properly reimburses you for the expenses:
- You as the employee do not have taxable income.
- The corporation gets the full deduction the law allows for the expenses.
- If the corporation is an S corporation, then those expenses reduce the corporate income and the corporation passes that reduced income to you—say, as the sole shareholder of your S corporation.
Technical note. Section 179 does not require the S corporation to obtain title to the property to expense it. Section 179 requires only that the corporation incur the cost for qualifying property that is predominantly used in the conduct of the business (see Reg. Sec. 1.179-1(a),(e)). Private Letter Ruling 200930029 does a good job of explaining this IRS- endorsed reimbursement of Section 179 expenses.
Document Your Reimbursement
To properly move the expense to the corporation, you must do some paper shuffling. First, your corporation needs to have an accountable plan, which can be as simple as requiring timely expense reports or a document stating that the corporation allows reimbursement of certain employee expenses. During the year, you will generally list your vehicle operating expenses on the expense report.
Second, you must submit an enhanced expense report to the corporation for the actual expense reimbursement of your personal use vehicle. The expense report must include:
- a receipt for the vehicle purchase that shows your ownership and the cost of the vehicle;
- a statement of recognition by you that the reimbursements of Section 179 expensing and/or bonus or other depreciation reduce the basis in your vehicle for purposes of gain or loss;
- a statement of recognition that you will reduce the overall annual Section 179 limits that apply to your and your spouse on your personal tax return by the amount of Section 179 expensing reimbursed by the corporation to you;
- a statement of recognition by you that if the business use of the vehicle drops to 50% or less, you will reimburse the corporation for the required recapture of deductions in excess of straight-lice depreciation (this requirement disappears when five years have passed or when you sell or trade the vehicle); and
- a mileage log that proves your percentage business use of the vehicle.
To assist with your submission of the vehicle expenses to the corporation as in the bullets above, contact me and I will email you our sample report for a personally owned vehicle.
A Note on the Mechanics
The Section 179 deduction does not separately show on either the corporate or the personal tax return. It is a reimbursement of an employee expense. On the corporate return, you have two choices for labeling the reimbursed vehicle expenses in the other deductions section:
- Vehicle expenses
- Employee reimbursed expenses
Remember. The employee reduces his or her basis in the vehicle by the amount of the deduction and faces recapture if business use declines to 50 percent or below.